Does Energoinstal (WSE:ENI) Have A Healthy Balance Sheet?

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. Importantly, Energoinstal S.A. (WSE:ENI) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Energoinstal

What Is Energoinstal's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Energoinstal had debt of zł29.1m, up from zł27.1m in one year. However, it also had zł4.81m in cash, and so its net debt is zł24.3m.

How Healthy Is Energoinstal's Balance Sheet?

The latest balance sheet data shows that Energoinstal had liabilities of zł60.5m due within a year, and liabilities of zł29.6m falling due after that. On the other hand, it had cash of zł4.81m and zł42.2m worth of receivables due within a year. So it has liabilities totalling zł43.2m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of zł70.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Energoinstal's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Energoinstal had a loss before interest and tax, and actually shrunk its revenue by 9.7%, to zł91m. We would much prefer see growth.

Caveat Emptor

Importantly, Energoinstal had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable zł15m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of zł21m. In the meantime, we consider the stock very 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. To that end, you should learn about the 3 warning signs we've spotted with Energoinstal (including 2 which are a bit concerning) .

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.