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Evoke Pharma (NASDAQ:EVOK) Has Debt But No Earnings; Should You Worry?

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Evoke Pharma, Inc. (NASDAQ:EVOK) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Evoke Pharma

What Is Evoke Pharma's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Evoke Pharma had debt of US$5.00m, up from US$2.10m in one year. But it also has US$16.7m in cash to offset that, meaning it has US$11.7m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Evoke Pharma's Balance Sheet?

We can see from the most recent balance sheet that Evoke Pharma had liabilities of US$6.23m falling due within a year, and liabilities of US$5.36m due beyond that. On the other hand, it had cash of US$16.7m and US$198.4k worth of receivables due within a year. So it can boast US$5.33m more liquid assets than total liabilities.

It's good to see that Evoke Pharma has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Evoke Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Evoke Pharma can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

It seems likely shareholders hope that Evoke Pharma can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Evoke Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Evoke Pharma had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$8.0m and booked a US$9.3m accounting loss. Given it only has net cash of US$11.7m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Evoke Pharma has 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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