Envipco Holding (AMS:ENVI) Is Making Moderate Use Of 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.' 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. As with many other companies Envipco Holding N.V. (AMS:ENVI) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Envipco Holding

How Much Debt Does Envipco Holding Carry?

The image below, which you can click on for greater detail, shows that Envipco Holding had debt of €5.89m at the end of March 2022, a reduction from €8.13m over a year. However, because it has a cash reserve of €2.15m, its net debt is less, at about €3.74m.

How Healthy Is Envipco Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Envipco Holding had liabilities of €21.2m due within 12 months and liabilities of €5.72m due beyond that. Offsetting this, it had €2.15m in cash and €15.5m in receivables that were due within 12 months. So it has liabilities totalling €9.28m more than its cash and near-term receivables, combined.

Since publicly traded Envipco Holding shares are worth a total of €117.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Envipco Holding'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 Envipco Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to €41m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Envipco Holding's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at €1.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €8.8m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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.

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.

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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.