Is Envipco Holding (AMS:ENVI) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Envipco Holding N.V. (AMS:ENVI) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Envipco Holding

How Much Debt Does Envipco Holding Carry?

As you can see below, at the end of December 2022, Envipco Holding had €13.1m of debt, up from €7.18m a year ago. Click the image for more detail. However, its balance sheet shows it holds €14.5m in cash, so it actually has €1.41m net cash.

A Look At Envipco Holding's Liabilities

According to the last reported balance sheet, Envipco Holding had liabilities of €37.1m due within 12 months, and liabilities of €11.8m due beyond 12 months. Offsetting this, it had €14.5m in cash and €12.1m in receivables that were due within 12 months. So its liabilities total €22.4m more than the combination of its cash and short-term receivables.

Of course, Envipco Holding has a market capitalization of €126.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Envipco Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to €56m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Envipco Holding?

Although Envipco Holding had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €4.7m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Envipco Holding shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Envipco Holding you should be aware of, and 1 of them is potentially serious.

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.