Is Enterprise Group (TSE:E) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Enterprise Group, Inc. (TSE:E) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 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 Enterprise Group

What Is Enterprise Group's Net Debt?

As you can see below, at the end of September 2021, Enterprise Group had CA$12.8m of debt, up from CA$12.0m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$1.62m, its net debt is less, at about CA$11.1m.

How Healthy Is Enterprise Group's Balance Sheet?

According to the last reported balance sheet, Enterprise Group had liabilities of CA$2.87m due within 12 months, and liabilities of CA$15.2m due beyond 12 months. Offsetting this, it had CA$1.62m in cash and CA$4.21m in receivables that were due within 12 months. So its liabilities total CA$12.2m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CA$15.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Enterprise Group will need earnings to service that debt. 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, Enterprise Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Enterprise Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$932k at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CA$4.1m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Enterprise Group .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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