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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Eloxx Pharmaceuticals, Inc. (NASDAQ:ELOX) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Eloxx Pharmaceuticals
What Is Eloxx Pharmaceuticals's Net Debt?
The image below, which you can click on for greater detail, shows that Eloxx Pharmaceuticals had debt of US$12.7m at the end of June 2021, a reduction from US$13.9m over a year. But on the other hand it also has US$56.7m in cash, leading to a US$44.0m net cash position.
How Healthy Is Eloxx Pharmaceuticals' Balance Sheet?
We can see from the most recent balance sheet that Eloxx Pharmaceuticals had liabilities of US$15.2m falling due within a year, and liabilities of US$4.76m due beyond that. Offsetting these obligations, it had cash of US$56.7m as well as receivables valued at US$35.0k due within 12 months. So it can boast US$36.8m more liquid assets than total liabilities.
This excess liquidity suggests that Eloxx Pharmaceuticals is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Eloxx Pharmaceuticals 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 Eloxx Pharmaceuticals'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.
It seems likely shareholders hope that Eloxx Pharmaceuticals can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is Eloxx Pharmaceuticals?
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 Eloxx Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$27m and booked a US$57m accounting loss. However, it has net cash of US$44.0m, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Eloxx Pharmaceuticals has 4 warning signs (and 2 which are a bit concerning) we think you should know about.
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. 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.
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