ENEA (WSE:ENA) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 ENEA S.A. (WSE:ENA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ENEA

What Is ENEA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 ENEA had zł5.81b of debt, an increase on zł4.60b, over one year. However, it also had zł5.47b in cash, and so its net debt is zł337.3m.

How Healthy Is ENEA's Balance Sheet?

According to the last reported balance sheet, ENEA had liabilities of zł14.4b due within 12 months, and liabilities of zł7.34b due beyond 12 months. Offsetting this, it had zł5.47b in cash and zł6.56b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł9.66b.

The deficiency here weighs heavily on the zł4.64b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, ENEA would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

ENEA has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.095 and EBIT of 10.7 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. In addition to that, we're happy to report that ENEA has boosted its EBIT by 62%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ENEA can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, ENEA produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Based on what we've seen ENEA is not finding it easy, given its level of total liabilities, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to grow its EBIT is pretty flash. We would also note that Electric Utilities industry companies like ENEA commonly do use debt without problems. When we consider all the elements mentioned above, it seems to us that ENEA is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. Even though ENEA lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.