Is EyePoint Pharmaceuticals (NASDAQ:EYPT) using debt in a risky way?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies EyePoint Pharmaceuticals, Inc. (NASDAQ:EYPT) uses debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
How much debt does EyePoint Pharmaceuticals have?
The image below, which you can click on for more details, shows that as of June 2022, EyePoint Pharmaceuticals had $39.7 million in debt, up from $36.2 million in one year. But he also has $171.2 million in cash to offset that, meaning he has a net cash of $131.5 million.
How strong is EyePoint Pharmaceuticals’ balance sheet?
Zooming in on the latest balance sheet data, we can see that EyePoint Pharmaceuticals had liabilities of US$33.4 million due within 12 months and liabilities of US$48.7 million due beyond. In return, he had $171.2 million in cash and $22.6 million in receivables due within 12 months. So he actually has US$111.7 million After liquid assets than total liabilities.
This excess liquidity suggests that EyePoint Pharmaceuticals’ balance sheet could take a hit as well as Homer Simpson’s head may take a hit. With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. Simply put, the fact that EyePoint Pharmaceuticals has more cash than debt is arguably a good indication that it can safely manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether EyePoint Pharmaceuticals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Last year, EyePoint Pharmaceuticals was not profitable on an EBIT level, but managed to increase its revenue by 5.9%, to $41 million. This rate of growth is a bit slow for our liking, but it takes all types to make a world.
So how risky is EyePoint Pharmaceuticals?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And last year, EyePoint Pharmaceuticals posted a loss in earnings before interest and taxes (EBIT), actually. Indeed, during this period, it burned $64 million in cash and suffered a loss of $77 million. With just $131.5 million on the balance sheet, it looks like it will soon have to raise capital again. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 2 warning signs we spotted with EyePoint Pharmaceuticals.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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