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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Enzo Biochem, Inc. (NYSE:ENZ) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Enzo Biochem Carry?
You can click the graphic below for the historical numbers, but it shows that Enzo Biochem had US$4.18m of debt in April 2022, down from US$11.5m, one year before. But on the other hand it also has US$31.1m in cash, leading to a US$27.0m net cash position.
How Healthy Is Enzo Biochem's Balance Sheet?
According to the last reported balance sheet, Enzo Biochem had liabilities of US$24.7m due within 12 months, and liabilities of US$17.0m due beyond 12 months. Offsetting this, it had US$31.1m in cash and US$11.8m in receivables that were due within 12 months. So it can boast US$1.17m more liquid assets than total liabilities.
This state of affairs indicates that Enzo Biochem's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$104.3m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Enzo Biochem has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Enzo Biochem will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Enzo Biochem saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
So How Risky Is Enzo Biochem?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Enzo Biochem 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$12m and booked a US$6.6m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$27.0m. That means it could keep spending at its current rate for more than two years. 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. 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. We've identified 2 warning signs with Enzo Biochem (at least 1 which is potentially serious) , and understanding them should be part of your investment process.
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.
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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.