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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.' 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. We can see that Enzo Biochem, Inc. (NYSE:ENZ) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Enzo Biochem Carry?
You can click the graphic below for the historical numbers, but it shows that as of July 2020 Enzo Biochem had US$11.6m of debt, an increase on US$4.32m, over one year. However, its balance sheet shows it holds US$47.9m in cash, so it actually has US$36.2m net cash.
How Healthy Is Enzo Biochem's Balance Sheet?
We can see from the most recent balance sheet that Enzo Biochem had liabilities of US$32.8m falling due within a year, and liabilities of US$21.4m due beyond that. Offsetting this, it had US$47.9m in cash and US$9.14m in receivables that were due within 12 months. So it can boast US$2.85m more liquid assets than total liabilities.
This short term liquidity is a sign that Enzo Biochem could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Enzo Biochem boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Enzo Biochem's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Enzo Biochem made a loss at the EBIT level, and saw its revenue drop to US$76m, which is a fall of 6.3%. That's not what we would hope to see.
So How Risky Is Enzo Biochem?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Enzo Biochem lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$19m and booked a US$29m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$36.2m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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. For example, we've discovered 1 warning sign for Enzo Biochem that you should be aware of before investing here.
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.
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