Is engage:BDR (ASX:EN1) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that engage:BDR Limited (ASX:EN1) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for engage:BDR

What Is engage:BDR's Debt?

The image below, which you can click on for greater detail, shows that engage:BDR had debt of AU$2.32m at the end of December 2020, a reduction from AU$6.81m over a year. However, its balance sheet shows it holds AU$3.03m in cash, so it actually has AU$714.1k net cash.

A Look At engage:BDR's Liabilities

We can see from the most recent balance sheet that engage:BDR had liabilities of AU$6.14m falling due within a year, and liabilities of AU$87.3k due beyond that. Offsetting this, it had AU$3.03m in cash and AU$5.23m in receivables that were due within 12 months. So it can boast AU$2.03m more liquid assets than total liabilities.

It's good to see that engage:BDR has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, engage:BDR boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since engage:BDR 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 engage:BDR had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to AU$15m. That's not what we would hope to see.

So How Risky Is engage:BDR?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that engage:BDR had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$2.0m of cash and made a loss of AU$6.9m. With only AU$714.1k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for engage:BDR you should know about.

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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