Is Eiger BioPharmaceuticals (NASDAQ:EIGR) Using Debt Sensibly?
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. We note that Eiger BioPharmaceuticals, Inc. (NASDAQ:EIGR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Eiger BioPharmaceuticals
What Is Eiger BioPharmaceuticals's Debt?
As you can see below, Eiger BioPharmaceuticals had US$31.6m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$85.3m in cash, leading to a US$53.7m net cash position.
How Strong Is Eiger BioPharmaceuticals' Balance Sheet?
The latest balance sheet data shows that Eiger BioPharmaceuticals had liabilities of US$22.0m due within a year, and liabilities of US$28.8m falling due after that. Offsetting this, it had US$85.3m in cash and US$2.76m in receivables that were due within 12 months. So it actually has US$37.3m more liquid assets than total liabilities.
This excess liquidity suggests that Eiger BioPharmaceuticals is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Eiger BioPharmaceuticals 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 it is future earnings, more than anything, that will determine Eiger BioPharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Eiger BioPharmaceuticals managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
So How Risky Is Eiger BioPharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Eiger BioPharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$70m and booked a US$31m accounting loss. However, it has net cash of US$53.7m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Eiger BioPharmaceuticals .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
