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.' 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. Importantly, Inozyme Pharma, Inc. (NASDAQ:INZY) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Inozyme Pharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Inozyme Pharma had US$45.6m of debt, an increase on US$32.1m, over one year. However, its balance sheet shows it holds US$131.6m in cash, so it actually has US$86.0m net cash.

How Healthy Is Inozyme Pharma's Balance Sheet?

The latest balance sheet data shows that Inozyme Pharma had liabilities of US$18.3m due within a year, and liabilities of US$42.2m falling due after that. Offsetting this, it had US$131.6m in cash and US$385.0k in receivables that were due within 12 months. So it actually has US$71.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Inozyme Pharma's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Inozyme Pharma 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 future earnings, more than anything, that will determine Inozyme Pharma's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, Inozyme Pharma shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Inozyme Pharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Inozyme Pharma had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$91m of cash and made a loss of US$96m. But at least it has US$86.0m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 instance, we've identified 4 warning signs for Inozyme Pharma (2 shouldn't be ignored) you should be aware of.

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.