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 note that enGene Holdings Inc. (NASDAQ:ENGN) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is enGene Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that enGene Holdings had US$22.7m of debt in April 2024, down from US$70.3m, one year before. However, it does have US$264.8m in cash offsetting this, leading to net cash of US$242.1m.
A Look At enGene Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that enGene Holdings had liabilities of US$6.30m due within 12 months and liabilities of US$24.3m due beyond that. On the other hand, it had cash of US$264.8m and US$1.21m worth of receivables due within a year. So it can boast US$235.5m more liquid assets than total liabilities.
This surplus strongly suggests that enGene Holdings 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 enGene Holdings 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 ultimately the future profitability of the business will decide if enGene Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Given its lack of meaningful operating revenue, enGene Holdings shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is enGene Holdings?
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 enGene Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$37m and booked a US$115m accounting loss. But the saving grace is the US$242.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that enGene Holdings is showing 3 warning signs in our investment analysis , and 1 of those is significant...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
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