Yahoo Finance Health Check: How Prudently Does Enterprise Group (TSE:E) Use Debt?
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 Enterprise Group, Inc. (TSE:E) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Enterprise Group
What Is Enterprise Group's Net Debt?
The chart below, which you can click on for greater detail, shows that Enterprise Group had CA$7.08m in debt in June 2019; about the same as the year before. However, it does have CA$1.29m in cash offsetting this, leading to net debt of about CA$5.79m.
A Look At Enterprise Group's Liabilities
We can see from the most recent balance sheet that Enterprise Group had liabilities of CA$2.46m falling due within a year, and liabilities of CA$11.7m due beyond that. Offsetting this, it had CA$1.29m in cash and CA$4.80m in receivables that were due within 12 months. So its liabilities total CA$8.11m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of CA$8.66m, so it does suggest shareholders should keep an eye on Enterprise Group's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Enterprise Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Enterprise Group made a loss at the EBIT level, and saw its revenue drop to CA$21m, which is a fall of 10%. That's not what we would hope to see.
Caveat Emptor
Not only did Enterprise Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$3.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CA$7.3m. So we do think this stock is quite risky. For riskier companies like Enterprise Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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