Yahoo Finance Here's Why Enphase Energy (NASDAQ:ENPH) Can Manage Its Debt Responsibly
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Enphase Energy, Inc. (NASDAQ:ENPH) makes use of debt. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Enphase Energy
What Is Enphase Energy's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Enphase Energy had debt of US$102.9m, up from US$52.0m in one year. However, it does have US$206.0m in cash offsetting this, leading to net cash of US$103.0m.
How Strong Is Enphase Energy's Balance Sheet?
The latest balance sheet data shows that Enphase Energy had liabilities of US$143.6m due within a year, and liabilities of US$220.6m falling due after that. Offsetting this, it had US$206.0m in cash and US$111.4m in receivables that were due within 12 months. So its liabilities total US$46.9m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Enphase Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$2.96b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Enphase Energy boasts net cash, so it's fair to say it does not have a heavy debt load!
We also note that Enphase Energy improved its EBIT from a last year's loss to a positive US$35m. 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 Enphase Energy 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Enphase Energy may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Enphase Energy generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing up
We could understand if investors are concerned about Enphase Energy's liabilities, but we can be reassured by the fact it has has net cash of US$103.0m. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in US$35m. So we are not troubled with Enphase Energy's debt use. We'd be motivated to research the stock further if we found out that Enphase Energy insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
