Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Eton Pharmaceuticals, Inc. (NASDAQ:ETON) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Eton Pharmaceuticals Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Eton Pharmaceuticals had US$6.76m of debt, an increase on US$4.95m, over one year. However, its balance sheet shows it holds US$25.8m in cash, so it actually has US$19.0m net cash.
How Strong Is Eton Pharmaceuticals' Balance Sheet?
We can see from the most recent balance sheet that Eton Pharmaceuticals had liabilities of US$3.11m falling due within a year, and liabilities of US$6.06m due beyond that. Offsetting this, it had US$25.8m in cash and US$303.0k in receivables that were due within 12 months. So it actually has US$16.9m more liquid assets than total liabilities.
This surplus suggests that Eton Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Eton Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Eton Pharmaceuticals 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.
Over 12 months, Eton Pharmaceuticals reported revenue of US$15m, which is a gain of 2,475%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Eton Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Eton Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$9.0m of cash and made a loss of US$11m. With only US$19.0m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Eton Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Eton Pharmaceuticals is showing 2 warning signs in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
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