Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Eagle Pharmaceuticals, Inc. (NASDAQ:EGRX) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Eagle Pharmaceuticals's Net Debt?
As you can see below, Eagle Pharmaceuticals had US$39.7m of debt at September 2019, down from US$44.3m a year prior. But it also has US$117.2m in cash to offset that, meaning it has US$77.5m net cash.
How Strong Is Eagle Pharmaceuticals's Balance Sheet?
We can see from the most recent balance sheet that Eagle Pharmaceuticals had liabilities of US$42.4m falling due within a year, and liabilities of US$38.9m due beyond that. Offsetting this, it had US$117.2m in cash and US$44.8m in receivables that were due within 12 months. So it actually has US$80.8m more liquid assets than total liabilities.
This surplus suggests that Eagle Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Eagle Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Eagle Pharmaceuticals's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Eagle 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Eagle Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Eagle Pharmaceuticals actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While we empathize with investors who find debt concerning, you should keep in mind that Eagle Pharmaceuticals has net cash of US$77.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$97m, being 120% of its EBIT. So we don't think Eagle Pharmaceuticals's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Eagle Pharmaceuticals, you may well want to click here to check an interactive graph of its earnings per share history.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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