Is Eagle Eye Solutions Group (LON:EYE) Weighed On By Its Debt Load?

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 can see that Eagle Eye Solutions Group plc (LON:EYE) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Eagle Eye Solutions Group

What Is Eagle Eye Solutions Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Eagle Eye Solutions Group had debt of UK£1.30m, up from none in one year. However, it does have UK£10.6m in cash offsetting this, leading to net cash of UK£9.32m.

How Healthy Is Eagle Eye Solutions Group's Balance Sheet?

We can see from the most recent balance sheet that Eagle Eye Solutions Group had liabilities of UK£18.5m falling due within a year, and liabilities of UK£5.00m due beyond that. Offsetting this, it had UK£10.6m in cash and UK£11.8m in receivables that were due within 12 months. So its liabilities total UK£1.05m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Eagle Eye Solutions Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£138.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Eagle Eye Solutions Group 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 Eagle Eye Solutions Group 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 Eagle Eye Solutions Group wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to UK£43m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Eagle Eye Solutions Group?

While Eagle Eye Solutions Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of UK£1.2m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that Eagle Eye Solutions Group is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Eagle Eye Solutions Group that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.