Health Check: How Prudently Does eEnergy Group (LON:EAAS) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that eEnergy Group Plc (LON:EAAS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for eEnergy Group

What Is eEnergy Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 eEnergy Group had debt of UK£2.22m, up from none in one year. But it also has UK£2.98m in cash to offset that, meaning it has UK£763.0k net cash.

How Healthy Is eEnergy Group's Balance Sheet?

The latest balance sheet data shows that eEnergy Group had liabilities of UK£9.06m due within a year, and liabilities of UK£2.68m falling due after that. Offsetting these obligations, it had cash of UK£2.98m as well as receivables valued at UK£3.55m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£5.20m.

Of course, eEnergy Group has a market capitalization of UK£35.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, eEnergy Group 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 eEnergy Group'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 eEnergy Group managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is eEnergy Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year eEnergy Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of UK£1.5m and booked a UK£3.0m accounting loss. Given it only has net cash of UK£763.0k, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that eEnergy Group has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that eEnergy Group is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...

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. 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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