Is Enthusiast Gaming Holdings (TSE:EGLX) Using Debt Sensibly?

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.' 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 the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Enthusiast Gaming Holdings

What Is Enthusiast Gaming Holdings's Debt?

As you can see below, Enthusiast Gaming Holdings had CA$9.37m of debt at March 2022, down from CA$15.7m a year prior. However, its balance sheet shows it holds CA$14.3m in cash, so it actually has CA$4.90m net cash.

How Healthy Is Enthusiast Gaming Holdings' Balance Sheet?

The latest balance sheet data shows that Enthusiast Gaming Holdings had liabilities of CA$60.6m due within a year, and liabilities of CA$54.5m falling due after that. Offsetting these obligations, it had cash of CA$14.3m as well as receivables valued at CA$30.1m due within 12 months. So it has liabilities totalling CA$70.7m more than its cash and near-term receivables, combined.

Since publicly traded Enthusiast Gaming Holdings shares are worth a total of CA$371.9m, 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. Despite its noteworthy liabilities, Enthusiast Gaming Holdings boasts net cash, 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 Enthusiast Gaming Holdings 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.

Over 12 months, Enthusiast Gaming Holdings reported revenue of CA$185m, which is a gain of 92%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Enthusiast Gaming Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Enthusiast Gaming Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$24m of cash and made a loss of CA$50m. Given it only has net cash of CA$4.90m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Enthusiast Gaming Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 4 warning signs for Enthusiast Gaming Holdings that you should be aware of before investing here.

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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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.