Is Enthusiast Gaming Holdings (TSE:EGLX) Weighed On By Its Debt Load?

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.' 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. We can see that Enthusiast Gaming Holdings Inc. (TSE:EGLX) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Enthusiast Gaming Holdings

What Is Enthusiast Gaming Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Enthusiast Gaming Holdings had debt of CA$14.8m at the end of September 2023, a reduction from CA$18.7m over a year. However, because it has a cash reserve of CA$2.86m, its net debt is less, at about CA$12.0m.

A Look At Enthusiast Gaming Holdings' Liabilities

According to the last reported balance sheet, Enthusiast Gaming Holdings had liabilities of CA$51.0m due within 12 months, and liabilities of CA$35.4m due beyond 12 months. Offsetting this, it had CA$2.86m in cash and CA$27.3m in receivables that were due within 12 months. So it has liabilities totalling CA$56.2m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$28.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Enthusiast Gaming Holdings would probably need a major re-capitalization if its creditors were to demand repayment. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Enthusiast Gaming Holdings had a loss before interest and tax, and actually shrunk its revenue by 10%, to CA$185m. That's not what we would hope to see.

Caveat Emptor

Not only did Enthusiast Gaming Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$38m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CA$7.5m in negative free cash flow over the last year. That means it's on the risky side of things. 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 4 warning signs with Enthusiast Gaming Holdings , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.