Is Eagle Pharmaceuticals (NASDAQ:EGRX) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Eagle Pharmaceuticals, Inc. (NASDAQ:EGRX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Eagle Pharmaceuticals

What Is Eagle Pharmaceuticals's Debt?

You can click the graphic below for the historical numbers, but it shows that Eagle Pharmaceuticals had US$23.7m of debt in March 2022, down from US$31.3m, one year before. However, its balance sheet shows it holds US$69.5m in cash, so it actually has US$45.8m net cash.

How Strong Is Eagle Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Eagle Pharmaceuticals had liabilities of US$101.6m due within 12 months, and liabilities of US$2.56m due beyond 12 months. Offsetting this, it had US$69.5m in cash and US$136.8m in receivables that were due within 12 months. So it can boast US$102.2m more liquid assets than total liabilities.

It's good to see that Eagle Pharmaceuticals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Eagle Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Eagle Pharmaceuticals grew its EBIT by 193% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Eagle Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Eagle Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Eagle Pharmaceuticals recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Eagle Pharmaceuticals has US$45.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$1.0m, being 85% of its EBIT. When it comes to Eagle Pharmaceuticals's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Eagle Pharmaceuticals 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here