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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. 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, ERYTECH Pharma S.A. (EPA:ERYP) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is ERYTECH Pharma's Net Debt?
As you can see below, ERYTECH Pharma had €1.42m of debt at December 2019, down from €1.98m a year prior. However, it does have €73.2m in cash offsetting this, leading to net cash of €71.8m.
How Healthy Is ERYTECH Pharma's Balance Sheet?
The latest balance sheet data shows that ERYTECH Pharma had liabilities of €19.9m due within a year, and liabilities of €13.1m falling due after that. On the other hand, it had cash of €73.2m and €5.82m worth of receivables due within a year. So it actually has €46.0m more liquid assets than total liabilities.
This surplus suggests that ERYTECH Pharma is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that ERYTECH Pharma 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 ultimately the future profitability of the business will decide if ERYTECH Pharma can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Given its lack of meaningful operating revenue, ERYTECH Pharma shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is ERYTECH Pharma?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year ERYTECH Pharma had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through €63m of cash and made a loss of €63m. However, it has net cash of €71.8m, so it has a bit of time before it will need more capital. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for ERYTECH Pharma you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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