We Think E2E Networks (NSE:E2E) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that E2E Networks Limited (NSE:E2E) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for E2E Networks

How Much Debt Does E2E Networks Carry?

As you can see below, at the end of September 2024, E2E Networks had ₹1.15b of debt, up from ₹126.9m a year ago. Click the image for more detail. However, it does have ₹4.18b in cash offsetting this, leading to net cash of ₹3.04b.

How Healthy Is E2E Networks' Balance Sheet?

The latest balance sheet data shows that E2E Networks had liabilities of ₹1.25b due within a year, and liabilities of ₹1.56b falling due after that. Offsetting these obligations, it had cash of ₹4.18b as well as receivables valued at ₹75.9m due within 12 months. So it actually has ₹1.45b more liquid assets than total liabilities.

This short term liquidity is a sign that E2E Networks could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that E2E Networks has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, E2E Networks's EBIT launched higher than Elon Musk, gaining a whopping 121% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since E2E Networks will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. E2E Networks may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, E2E Networks burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that E2E Networks has net cash of ₹3.04b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 121% over the last year. So we don't have any problem with E2E Networks's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for E2E Networks (of which 1 can't be ignored!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.