Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Eiger BioPharmaceuticals, Inc. (NASDAQ:EIGR) uses debt in its business. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
What is Eiger BioPharmaceuticals’ net debt?
You can click on the graph below for historical numbers, but it shows that in June 2022, Eiger BioPharmaceuticals had debt of $38.9 million, an increase from $31.4 million, on a year. However, he has $141.8 million in cash to offset that, which translates to net cash of $102.9 million.
How healthy is Eiger BioPharmaceuticals’ balance sheet?
The latest balance sheet data shows that Eiger BioPharmaceuticals had liabilities of $21.8 million due within the year, and liabilities of $38.9 million due thereafter. In compensation for these obligations, it had cash of US$141.8 million as well as receivables valued at US$1.04 million and maturing within 12 months. He can therefore boast of having $82.1 million in cash more than total Passives.
This excess liquidity is an excellent indication that Eiger BioPharmaceuticals’ balance sheet is almost as strong as Fort Knox’s. Given this fact, we believe its balance sheet is as strong as an ox. Simply put, the fact that Eiger BioPharmaceuticals has more cash than debt is arguably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Eiger BioPharmaceuticals can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Eiger BioPharmaceuticals was not profitable in terms of EBIT, but managed to increase its turnover by 129%, to 13 million dollars. There is therefore no doubt that shareholders encourage growth
So how risky is Eiger BioPharmaceuticals?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And the fact is that over the past twelve months, Eiger BioPharmaceuticals has been losing money in earnings before interest and taxes (EBIT). Indeed, during this period, it burned $76 million in cash and suffered a loss of $89 million. But at least it has $102.9 million on the balance sheet to spend on near-term growth. The good news for shareholders is that Eiger BioPharmaceuticals has skyrocketing revenue growth, so there is a very good chance that it can increase its free cash flow in the years to come. While unprofitable businesses can be risky, they can also grow strongly and quickly in those pre-profit years. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that Eiger BioPharmaceuticals shows 2 warning signs in our investment analysis you should know…
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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