Stock Analysis

Is Enthusiast Gaming Holdings (TSE:EGLX) Using Debt In A Risky Way?

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TSX:EGLX
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Enthusiast Gaming Holdings Inc. (TSE:EGLX) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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How Much Debt Does Enthusiast Gaming Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Enthusiast Gaming Holdings had CA$15.7m of debt in March 2021, down from CA$27.8m, one year before. But it also has CA$24.5m in cash to offset that, meaning it has CA$8.79m net cash.

debt-equity-history-analysis
TSX:EGLX Debt to Equity History June 3rd 2021

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$22.0m due within 12 months and liabilities of CA$31.5m due beyond that. On the other hand, it had cash of CA$24.5m and CA$18.6m worth of receivables due within a year. So it has liabilities totalling CA$10.4m more than its cash and near-term receivables, combined.

Having regard to Enthusiast Gaming Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$976.9m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Enthusiast Gaming Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, Enthusiast Gaming Holdings reported revenue of CA$96m, which is a gain of 396%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

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$18m and booked a CA$35m accounting loss. With only CA$8.79m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Enthusiast Gaming Holdings has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Enthusiast Gaming Holdings (at least 1 which is 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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