U.S. markets closed

Is Enanta Pharmaceuticals (NASDAQ:ENTA) Using Too Much Debt?

Simply Wall St

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Enanta Pharmaceuticals

How Much Debt Does Enanta Pharmaceuticals Carry?

As you can see below, Enanta Pharmaceuticals had US$1.63m of debt, at December 2019, 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$373.8m in cash, leading to a US$372.2m net cash position.

NasdaqGS:ENTA Historical Debt April 17th 2020

A Look At Enanta Pharmaceuticals's Liabilities

According to the last reported balance sheet, Enanta Pharmaceuticals had liabilities of US$19.1m due within 12 months, and liabilities of US$9.55m due beyond 12 months. Offsetting these obligations, it had cash of US$373.8m as well as receivables valued at US$52.6m due within 12 months. So it can boast US$397.7m more liquid assets than total liabilities.

This luscious liquidity implies that Enanta Pharmaceuticals's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Enanta Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Enanta Pharmaceuticals's saving grace is its low debt levels, because its EBIT has tanked 79% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Enanta Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Enanta 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. During the last three years, Enanta Pharmaceuticals generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Enanta Pharmaceuticals has US$372.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$48m, being 90% of its EBIT. So we don't think Enanta Pharmaceuticals's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Enanta Pharmaceuticals you should be aware of.

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 editorial-team@simplywallst.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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.