Is Elsight (ASX:ELS) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Elsight Limited (ASX:ELS) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Elsight

How Much Debt Does Elsight Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Elsight had US$4.14m of debt, an increase on none, over one year. But it also has US$5.19m in cash to offset that, meaning it has US$1.06m net cash.

A Look At Elsight's Liabilities

Zooming in on the latest balance sheet data, we can see that Elsight had liabilities of US$941.6k due within 12 months and liabilities of US$4.21m due beyond that. Offsetting this, it had US$5.19m in cash and US$584.2k in receivables that were due within 12 months. So it can boast US$623.5k more liquid assets than total liabilities.

Having regard to Elsight's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$31.5m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Elsight has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Elsight'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.

Over 12 months, Elsight reported revenue of US$823k, which is a gain of 43%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Elsight?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Elsight 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 US$3.7m and booked a US$4.3m accounting loss. Given it only has net cash of US$1.06m, the company may need to raise more capital if it doesn't reach break-even soon. Elsight's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. Case in point: We've spotted 4 warning signs for Elsight you should be aware of, and 2 of them are significant.

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.