Would Eden Innovations (ASX:EDE) Be Better Off With Less 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Eden Innovations

What Is Eden Innovations's Debt?

As you can see below, Eden Innovations had AU$5.26m of debt at June 2021, down from AU$6.00m a year prior. However, because it has a cash reserve of AU$2.18m, its net debt is less, at about AU$3.08m.

How Strong Is Eden Innovations' Balance Sheet?

The latest balance sheet data shows that Eden Innovations had liabilities of AU$5.83m due within a year, and liabilities of AU$504.5k falling due after that. Offsetting this, it had AU$2.18m in cash and AU$568.7k in receivables that were due within 12 months. So it has liabilities totalling AU$3.59m more than its cash and near-term receivables, combined.

Given Eden Innovations has a market capitalization of AU$40.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Eden Innovations will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Eden Innovations wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to AU$3.3m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Eden Innovations managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable AU$5.1m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$1.9m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 6 warning signs with Eden Innovations (at least 2 which are concerning) , and understanding them should be part of your investment process.

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. 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.
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