Is EDP (TSE:7794) A Risky Investment?

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.' 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 note that EDP Corporation (TSE:7794) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for EDP

What Is EDP's Debt?

The image below, which you can click on for greater detail, shows that EDP had debt of JP¥253.0m at the end of December 2023, a reduction from JP¥372.0m over a year. But on the other hand it also has JP¥839.0m in cash, leading to a JP¥586.0m net cash position.

How Healthy Is EDP's Balance Sheet?

The latest balance sheet data shows that EDP had liabilities of JP¥200.0m due within a year, and liabilities of JP¥284.0m falling due after that. On the other hand, it had cash of JP¥839.0m and JP¥54.0m worth of receivables due within a year. So it actually has JP¥409.0m more liquid assets than total liabilities.

This surplus suggests that EDP has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, EDP boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is EDP's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, EDP made a loss at the EBIT level, and saw its revenue drop to JP¥1.1b, which is a fall of 57%. That makes us nervous, to say the least.

So How Risky Is EDP?

Although EDP had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of JP¥12m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 EDP (of which 1 is potentially serious!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.