Stock Analysis

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

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TSX:EGLX
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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$10.0m of debt in June 2021, down from CA$28.9m, one year before. However, it does have CA$53.9m in cash offsetting this, leading to net cash of CA$43.9m.

debt-equity-history-analysis
TSX:EGLX Debt to Equity History October 27th 2021

A Look At Enthusiast Gaming Holdings' Liabilities

The latest balance sheet data shows that Enthusiast Gaming Holdings had liabilities of CA$29.4m due within a year, and liabilities of CA$27.8m falling due after that. On the other hand, it had cash of CA$53.9m and CA$22.8m worth of receivables due within a year. So it actually has CA$19.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Enthusiast Gaming Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Enthusiast Gaming Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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$126m, which is a gain of 377%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Enthusiast Gaming Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Enthusiast Gaming Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$24m and booked a CA$41m accounting loss. With only CA$43.9m 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. High growth pre-profit companies may well be 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 - Enthusiast Gaming Holdings has 3 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.

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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