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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.' 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. As with many other companies Enzo Biochem, Inc. (NYSE:ENZ) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Enzo Biochem's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Enzo Biochem had US$4.47m of debt in October 2021, down from US$11.6m, one year before. But on the other hand it also has US$36.2m in cash, leading to a US$31.7m net cash position.
How Strong Is Enzo Biochem's Balance Sheet?
We can see from the most recent balance sheet that Enzo Biochem had liabilities of US$23.1m falling due within a year, and liabilities of US$18.3m due beyond that. On the other hand, it had cash of US$36.2m and US$11.3m worth of receivables due within a year. So it actually has US$6.12m 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. Simply put, the fact that Enzo Biochem 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 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 reported revenue of US$116m, which is a gain of 37%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Enzo Biochem?
While Enzo Biochem lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$5.3m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 37% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Enzo Biochem you should know about.
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.
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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.