Stock Analysis

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

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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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Enthusiast Gaming Holdings Inc. (TSE:EGLX) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Enthusiast Gaming Holdings

How Much Debt Does Enthusiast Gaming Holdings Carry?

The image below, which you can click on for greater detail, shows that Enthusiast Gaming Holdings had debt of CA$8.92m at the end of June 2022, a reduction from CA$10.0m over a year. However, its balance sheet shows it holds CA$15.1m in cash, so it actually has CA$6.15m net cash.

TSX:EGLX Debt to Equity History September 27th 2022

How Strong Is Enthusiast Gaming Holdings' Balance Sheet?

According to the last reported balance sheet, Enthusiast Gaming Holdings had liabilities of CA$51.5m due within 12 months, and liabilities of CA$35.5m due beyond 12 months. Offsetting this, it had CA$15.1m in cash and CA$32.9m in receivables that were due within 12 months. So it has liabilities totalling CA$39.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Enthusiast Gaming Holdings is worth CA$171.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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. 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 reported revenue of CA$199m, which is a gain of 58%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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 we do note that Enthusiast Gaming Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$12m of cash and made a loss of CA$54m. Given it only has net cash of CA$6.15m, 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Enthusiast Gaming Holdings that 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.

Valuation is complex, but we're helping make it simple.

Find out whether Enthusiast Gaming Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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