Enanta Pharmaceuticals (NASDAQ:ENTA) Has Debt But No Revenue; Should you be worried?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) has debt on its balance sheet. But the more important question is: what risk does this debt create?

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

Check out our latest analysis for Enanta Pharmaceuticals

What is Enanta Pharmaceuticals’ net debt?

As you can see below, Enanta Pharmaceuticals had $1.51 million in debt as of March 2022, roughly the same as the previous year. You can click on the graph for more details. But on the other hand, he also has $280.3 million in cash, resulting in a net cash position of $278.8 million.

NasdaqGS: ENTA Debt to Equity History July 4, 2022

How strong is Enanta Pharmaceuticals’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Enanta Pharmaceuticals had liabilities of US$30.7 million due within 12 months and liabilities of US$17.5 million due beyond. In compensation for these obligations, it had cash of US$280.3 million as well as receivables valued at US$47.5 million and maturing within 12 months. So he actually has US$279.6 million After liquid assets than total liabilities.

This surplus suggests that Enanta Pharmaceuticals is using debt in a way that seems both safe and prudent. Due to her strong net asset position, she is unlikely to run into problems with her lenders. In short, Enanta Pharmaceuticals has clean cash, so it’s fair to say that they don’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Enanta Pharmaceuticals’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Last year, Enanta Pharmaceuticals recorded a loss before interest and taxes and actually reduced its revenue by 2.8%, to $92 million. It’s not what we expected to see.

So how risky is Enanta Pharmaceuticals?

We have no doubt that loss-making companies are, in general, more risky than profitable companies. And over the past year, Enanta Pharmaceuticals has posted a loss in earnings before interest and taxes (EBIT), if truth be told. And during the same period, it recorded a negative free cash outflow of US$91 million and recorded a book loss of US$112 million. Given that it only has net cash of US$278.8 million, the company may need to raise more capital if it does not break even soon. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Enanta Pharmaceuticals you should know.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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