Is Eden Innovations (ASX:EDE) Using Too Much 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 Eden Innovations Ltd (ASX:EDE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Eden Innovations

What Is Eden Innovations's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Eden Innovations had debt of AU$10.7m, up from AU$9.10m in one year. However, because it has a cash reserve of AU$1.42m, its net debt is less, at about AU$9.29m.

A Look At Eden Innovations' Liabilities

Zooming in on the latest balance sheet data, we can see that Eden Innovations had liabilities of AU$12.4m due within 12 months and liabilities of AU$119.6k due beyond that. Offsetting this, it had AU$1.42m in cash and AU$228.9k in receivables that were due within 12 months. So it has liabilities totalling AU$10.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of AU$11.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Eden Innovations made a loss at the EBIT level, and saw its revenue drop to AU$2.5m, which is a fall of 52%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Eden Innovations's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping AU$6.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$5.4m of cash over the last year. So suffice it to say we consider the stock very 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. Case in point: We've spotted 6 warning signs for Eden Innovations you should be aware of, and 4 of them are potentially serious.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.