Enterprise Group (TSE:E) Has Debt But No Earnings; Should You Worry?

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. Importantly, Enterprise Group, Inc. (TSE:E) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Enterprise Group

How Much Debt Does Enterprise Group Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Enterprise Group had debt of CA$12.0m, up from CA$9.19m in one year. However, it does have CA$2.88m in cash offsetting this, leading to net debt of about CA$9.17m.

How Strong Is Enterprise Group's Balance Sheet?

According to the last reported balance sheet, Enterprise Group had liabilities of CA$1.93m due within 12 months, and liabilities of CA$14.7m due beyond 12 months. Offsetting this, it had CA$2.88m in cash and CA$3.51m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$10.3m.

This is a mountain of leverage relative to its market capitalization of CA$10.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Enterprise Group'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, Enterprise Group made a loss at the EBIT level, and saw its revenue drop to CA$17m, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

Not only did Enterprise Group'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 CA$2.0m. 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. We would feel better if it turned its trailing twelve month loss of CA$4.1m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Enterprise Group (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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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