Is Eguana Technologies (CVE:EGT) A Risky Investment?

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 Eguana Technologies Inc. (CVE:EGT) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Eguana Technologies

What Is Eguana Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Eguana Technologies had debt of CA$34.9m, up from CA$5.48m in one year. On the flip side, it has CA$34.3m in cash leading to net debt of about CA$575.0k.

How Strong Is Eguana Technologies' Balance Sheet?

The latest balance sheet data shows that Eguana Technologies had liabilities of CA$11.1m due within a year, and liabilities of CA$33.7m falling due after that. On the other hand, it had cash of CA$34.3m and CA$6.28m worth of receivables due within a year. So it has liabilities totalling CA$4.16m more than its cash and near-term receivables, combined.

Given Eguana Technologies has a market capitalization of CA$114.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Eguana Technologies has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Eguana Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Eguana Technologies had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to CA$6.5m. We would much prefer see growth.

Caveat Emptor

Importantly, Eguana Technologies had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$10m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$16m of cash over the last year. So suffice it to say we consider the stock very 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Eguana Technologies (of which 1 doesn't sit too well with us!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.