Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Enzo Biochem, Inc. (NYSE:ENZ) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Enzo Biochem

How Much Debt Does Enzo Biochem Carry?

The image below, which you can click on for greater detail, shows that Enzo Biochem had debt of US$4.22m at the end of October 2022, a reduction from US$4.47m over a year. But it also has US$12.1m in cash to offset that, meaning it has US$7.92m net cash.

A Look At Enzo Biochem's Liabilities

The latest balance sheet data shows that Enzo Biochem had liabilities of US$24.3m due within a year, and liabilities of US$16.0m falling due after that. On the other hand, it had cash of US$12.1m and US$11.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$16.6m.

Given Enzo Biochem has a market capitalization of US$109.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Enzo Biochem also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Enzo Biochem will need earnings to service that debt. 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 made a loss at the EBIT level, and saw its revenue drop to US$99m, which is a fall of 15%. We would much prefer see growth.

So How Risky Is Enzo Biochem?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Enzo Biochem lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$22m of cash and made a loss of US$27m. But the saving grace is the US$7.92m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Enzo Biochem that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.