Eden Innovations (ASX:EDE) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Eden Innovations Ltd (ASX:EDE) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Eden Innovations

What Is Eden Innovations's Net Debt?

As you can see below, at the end of December 2020, Eden Innovations had AU$5.10m of debt, up from AU$836.4k a year ago. Click the image for more detail. But it also has AU$5.54m in cash to offset that, meaning it has AU$446.5k net cash.

How Strong Is Eden Innovations' Balance Sheet?

The latest balance sheet data shows that Eden Innovations had liabilities of AU$5.52m due within a year, and liabilities of AU$532.6k falling due after that. Offsetting this, it had AU$5.54m in cash and AU$324.8k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$188.6k.

This state of affairs indicates that Eden Innovations' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$74.8m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Eden Innovations also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Eden Innovations's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Eden Innovations wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to AU$2.8m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Eden Innovations?

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 Eden Innovations had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$8.6m and booked a AU$7.9m accounting loss. Given it only has net cash of AU$446.5k, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Eden Innovations may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 6 warning signs we've spotted with Eden Innovations (including 2 which are a bit unpleasant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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. 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.
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