Is enCore Energy (CVE:EU) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, enCore Energy Corp. (CVE:EU) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for enCore Energy

What Is enCore Energy's Net Debt?

The image below, which you can click on for greater detail, shows that enCore Energy had debt of US$21.2m at the end of September 2024, a reduction from US$39.3m over a year. However, it does have US$66.9m in cash offsetting this, leading to net cash of US$45.7m.

How Strong Is enCore Energy's Balance Sheet?

We can see from the most recent balance sheet that enCore Energy had liabilities of US$27.1m falling due within a year, and liabilities of US$11.5m due beyond that. On the other hand, it had cash of US$66.9m and US$1.69m worth of receivables due within a year. So it actually has US$29.9m more liquid assets than total liabilities.

This short term liquidity is a sign that enCore Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that enCore Energy 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 future earnings, more than anything, that will determine enCore Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year enCore Energy managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is enCore Energy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that enCore Energy 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$34m and booked a US$46m accounting loss. However, it has net cash of US$45.7m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for enCore Energy you should know about.

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.

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.