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 note that EyePoint Pharmaceuticals, Inc. (NASDAQ:EYPT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does EyePoint Pharmaceuticals Carry?
The image below, which you can click on for greater detail, shows that EyePoint Pharmaceuticals had debt of US$38.1m at the end of March 2021, a reduction from US$47.7m over a year. But on the other hand it also has US$138.6m in cash, leading to a US$100.5m net cash position.
A Look At EyePoint Pharmaceuticals’ Liabilities
The latest balance sheet data shows that EyePoint Pharmaceuticals had liabilities of US$13.4m due within a year, and liabilities of US$58.0m falling due after that. Offsetting this, it had US$138.6m in cash and US$12.3m in receivables that were due within 12 months. So it can boast US$79.5m more liquid assets than total liabilities.
This surplus strongly suggests that EyePoint Pharmaceuticals has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that EyePoint Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine EyePoint Pharmaceuticals’s ability to maintain a healthy balance sheet going forward.
Over 12 months, EyePoint Pharmaceuticals reported revenue of US$34m, which is a gain of 33%, 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 EyePoint Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year EyePoint Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$14m of cash and made a loss of US$45m. With only US$100.5m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, EyePoint Pharmaceuticals may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start.