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Is Epizyme (NASDAQ:EPZM) Weighed On By Its Debt Load?

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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Epizyme, Inc. (NASDAQ:EPZM) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Epizyme

What Is Epizyme's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Epizyme had US$82.3m of debt, an increase on none, over one year. However, it does have US$279.9m in cash offsetting this, leading to net cash of US$197.7m.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Epizyme's Balance Sheet?

According to the last reported balance sheet, Epizyme had liabilities of US$34.8m due within 12 months, and liabilities of US$102.6m due beyond 12 months. Offsetting this, it had US$279.9m in cash and US$4.61m in receivables that were due within 12 months. So it can boast US$147.2m more liquid assets than total liabilities.

This surplus suggests that Epizyme has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Epizyme has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Epizyme'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.

In the last year Epizyme had a loss before interest and tax, and actually shrunk its revenue by 60%, to US$12m. To be frank that doesn't bode well.

So How Risky Is Epizyme?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Epizyme had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$239m and booked a US$222m accounting loss. But at least it has US$197.7m on the balance sheet to spend on growth, near-term. 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. Take risks, for example - Epizyme has 2 warning signs we think 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.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.