Health Check: How Prudently Does Eden Innovations (ASX:EDE) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Eden Innovations Ltd (ASX:EDE) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Eden Innovations Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Eden Innovations had AU$14.6m of debt, an increase on AU$10.7m, over one year. However, it does have AU$858.0k in cash offsetting this, leading to net debt of about AU$13.7m.

How Strong Is Eden Innovations' Balance Sheet?

We can see from the most recent balance sheet that Eden Innovations had liabilities of AU$17.7m falling due within a year, and liabilities of AU$73.6k due beyond that. Offsetting these obligations, it had cash of AU$858.0k as well as receivables valued at AU$444.5k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$16.4m.

Given this deficit is actually higher than the company's market capitalization of AU$12.3m, we think shareholders really should watch Eden Innovations's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Eden Innovations'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.

Check out our latest analysis for Eden Innovations

In the last year Eden Innovations's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Eden Innovations produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$5.4m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through AU$4.5m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for Eden Innovations (4 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.