Is Enersense International Oyj (HEL:ESENSE) A Risky Investment?

By
Simply Wall St
Published
May 25, 2021
HLSE:ESENSE
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Enersense International Oyj (HEL:ESENSE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Enersense International Oyj

What Is Enersense International Oyj's Net Debt?

As you can see below, at the end of March 2021, Enersense International Oyj had €19.4m of debt, up from €3.88m a year ago. Click the image for more detail. However, its balance sheet shows it holds €22.9m in cash, so it actually has €3.47m net cash.

debt-equity-history-analysis
HLSE:ESENSE Debt to Equity History May 26th 2021

How Strong Is Enersense International Oyj's Balance Sheet?

The latest balance sheet data shows that Enersense International Oyj had liabilities of €79.2m due within a year, and liabilities of €4.30m falling due after that. On the other hand, it had cash of €22.9m and €41.7m worth of receivables due within a year. So its liabilities total €18.9m more than the combination of its cash and short-term receivables.

Given Enersense International Oyj has a market capitalization of €110.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Enersense International Oyj 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 Enersense International Oyj can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Enersense International Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 205%, to €183m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Enersense International Oyj?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Enersense International Oyj lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €15m and booked a €3.0m accounting loss. Given it only has net cash of €3.47m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Enersense International Oyj's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. We've identified 1 warning sign with Enersense International Oyj , 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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