Eguana Technologies (CVE:EGT) Has Debt But No Earnings; Should You Worry?

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. We can see that Eguana Technologies Inc. (CVE:EGT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Eguana Technologies

How Much Debt Does Eguana Technologies Carry?

As you can see below, Eguana Technologies had CA$9.67m of debt at March 2021, down from CA$13.7m a year prior. However, it does have CA$15.0m in cash offsetting this, leading to net cash of CA$5.36m.

How Healthy Is Eguana Technologies' Balance Sheet?

The latest balance sheet data shows that Eguana Technologies had liabilities of CA$7.17m due within a year, and liabilities of CA$9.48m falling due after that. On the other hand, it had cash of CA$15.0m and CA$429.2k worth of receivables due within a year. So its liabilities total CA$1.20m more than the combination of its cash and short-term receivables.

Having regard to Eguana Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$121.1m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Eguana Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Eguana Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Eguana Technologies reported revenue of CA$6.2m, which is a gain of 2.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Eguana Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Eguana Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$6.9m of cash and made a loss of CA$8.9m. With only CA$5.36m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 5 warning signs with Eguana Technologies (at least 2 which are a bit 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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