Stock Analysis

Health Check: How Prudently Does Enthusiast Gaming Holdings (TSE:EGLX) Use Debt?

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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Enthusiast Gaming Holdings Inc. (TSE:EGLX) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Enthusiast Gaming Holdings

What Is Enthusiast Gaming Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Enthusiast Gaming Holdings had CA$9.91m of debt in September 2021, down from CA$35.4m, one year before. But on the other hand it also has CA$33.7m in cash, leading to a CA$23.7m net cash position.

TSX:EGLX Debt to Equity History February 23rd 2022

How Healthy Is Enthusiast Gaming Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Enthusiast Gaming Holdings had liabilities of CA$52.0m due within 12 months and liabilities of CA$29.3m due beyond that. On the other hand, it had cash of CA$33.7m and CA$27.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$19.8m.

Since publicly traded Enthusiast Gaming Holdings shares are worth a total of CA$478.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Enthusiast Gaming Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Enthusiast Gaming Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 285%, to CA$153m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Enthusiast Gaming Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Enthusiast Gaming Holdings 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 CA$25m and booked a CA$46m accounting loss. With only CA$23.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Enthusiast Gaming Holdings's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Enthusiast Gaming Holdings is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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