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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Enertime SA (EPA:ALENE) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we think about a company's use of debt, we first look at cash and debt together.
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What Is Enertime's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Enertime had €1.35m of debt in June 2021, down from €1.41m, one year before. However, it does have €787.2k in cash offsetting this, leading to net debt of about €562.8k.
How Strong Is Enertime's Balance Sheet?
The latest balance sheet data shows that Enertime had liabilities of €707.0k due within a year, and liabilities of €2.55m falling due after that. On the other hand, it had cash of €787.2k and €2.24m worth of receivables due within a year. So its liabilities total €229.8k more than the combination of its cash and short-term receivables.
Having regard to Enertime's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €16.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Enertime'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.
In the last year Enertime had a loss before interest and tax, and actually shrunk its revenue by 13%, to €2.8m. That's not what we would hope to see.
Caveat Emptor
While Enertime's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €2.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of €2.9m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for Enertime that you should be aware of.
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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Access Free AnalysisThis 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.
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About ENXTPA:ALENE
Enertime
Engages in the design, development, and implementation of Organic Rankine Cycle (ORC) modules to produce renewable or CO2-free electricity from heat.
Moderate and overvalued.