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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Corporate Group, Inc. (TSE: E) uses debt. But does this debt concern shareholders?
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Enterprise Group
What is the debt of the Enterprise Group?
As you can see below, Enterprise Group had C $ 10.6 million in debt as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. However, it has C $ 1.00 million in cash offsetting this, leading to net debt of around C $ 9.62 million.
A look at the liabilities of the Enterprise Group
The latest balance sheet data shows that Enterprise Group had C $ 2.30 million in liabilities due within one year and C $ 12.9 million in liabilities due after that. In compensation for these obligations, it had cash of CA $ 1.00 million as well as receivables valued at CA $ 2.87 million maturing within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by C $ 11.3 million.
This deficit is substantial compared to its market capitalization of C $ 13.0 million, so he suggests shareholders keep an eye on the use of Enterprise Group debt. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Enterprise Group will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over the past year, Enterprise Group has incurred a loss before interest and taxes and has actually reduced its revenue by 15% to C $ 15 million. We would much prefer to see the growth.
Emptor Warning
While Enterprise Group’s declining revenue is about as comforting as a wet hedge, its earnings before interest and taxes (EBIT) can be said to be even less attractive. To be precise, the EBIT loss amounted to CA $ 161,000. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. For example, we would not want to see a repeat of the loss of C $ 4.6 million from last year. In short, it is a really risky action. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 1 warning sign we spotted with Enterprise Group.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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