Does Envipco Holding (AMS:ENVI) Have A Healthy Balance Sheet?

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.' 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 can see that Envipco Holding N.V. (AMS:ENVI) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Envipco Holding

What Is Envipco Holding's Debt?

As you can see below, at the end of September 2024, Envipco Holding had €26.0m of debt, up from €20.2m a year ago. Click the image for more detail. But it also has €28.7m in cash to offset that, meaning it has €2.67m net cash.

How Strong Is Envipco Holding's Balance Sheet?

We can see from the most recent balance sheet that Envipco Holding had liabilities of €44.1m falling due within a year, and liabilities of €15.8m due beyond that. Offsetting this, it had €28.7m in cash and €26.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.49m.

Having regard to Envipco Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €343.3m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Envipco Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Envipco Holding made a loss at the EBIT level, last year, but improved that to positive EBIT of €5.6m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Envipco Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Envipco Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent year, Envipco Holding recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Envipco Holding has €2.67m in net cash. So we don't have any problem with Envipco Holding's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Envipco Holding that you should be aware of before investing here.

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. 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.