David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Enrad AB (NGM: ENRAD) uses debt in its business. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Enrad
What is Enrad’s debt?
You can click on the graph below for historical figures, but it shows that in March 2022, Enrad had a debt of 15.0 million kr, an increase of 1.84 million kr, year on year. On the other hand, he has 12.4 million kr in cash, resulting in a net debt of around 2.56 million kr.
How strong is Enrad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Enrad had liabilities of 9.28 million kr due within 12 months and liabilities of 15.3 million kr due beyond. On the other hand, he had cash of 12.4 million kr and 7.17 million kr of receivables due within one year. Thus, its liabilities total 4.95 million kr more than the combination of its cash and short-term receivables.
Of course, Enrad has a market capitalization of 61.7 million kr, so these liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; because Enrad will need income to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Over 12 months, Enrad reported revenue of kr 18 million, a gain of 10%, although it reported no earnings before interest and taxes. We generally like to see faster growth from unprofitable companies, but each in its own way.
Caveat Emptor
Over the past twelve months, Enrad has recorded a loss of earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to 5.8 million kr. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. So we think its balance sheet is a little stretched, but not beyond repair. However, it doesn’t help that he burned 5.2m kr in cash in the last year. In short, it’s a really risky title. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 4 warning signs for Enrad (2 doesn’t sit too well with us) you should know.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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