Enthusiast Gaming Holdings (TSE:EGLX) Is Carrying A Fair Bit Of Debt

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. Importantly, Enthusiast Gaming Holdings Inc. (TSE:EGLX) does carry debt. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Enthusiast Gaming Holdings

What Is Enthusiast Gaming Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Enthusiast Gaming Holdings had debt of CA$15.4m, up from CA$8.92m in one year. However, it also had CA$2.87m in cash, and so its net debt is CA$12.5m.

A Look At Enthusiast Gaming Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Enthusiast Gaming Holdings had liabilities of CA$46.3m due within 12 months and liabilities of CA$37.4m due beyond that. Offsetting this, it had CA$2.87m in cash and CA$29.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$51.5m.

Enthusiast Gaming Holdings has a market capitalization of CA$97.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Enthusiast Gaming Holdings'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, Enthusiast Gaming Holdings made a loss at the EBIT level, and saw its revenue drop to CA$190m, which is a fall of 4.3%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Enthusiast Gaming Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$40m 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. Another cause for caution is that is bled CA$17m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Enthusiast Gaming Holdings has 4 warning signs we think you should be aware of.

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.

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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.