Is Enad Global 7 (STO:EG7) Using Too Much Debt?

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.' 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. We note that Enad Global 7 AB (publ) (STO:EG7) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Enad Global 7

What Is Enad Global 7's Debt?

As you can see below, at the end of September 2021, Enad Global 7 had kr406.9m of debt, up from kr220.6m a year ago. Click the image for more detail. But it also has kr442.2m in cash to offset that, meaning it has kr35.3m net cash.

How Healthy Is Enad Global 7's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Enad Global 7 had liabilities of kr492.8m due within 12 months and liabilities of kr1.34b due beyond that. On the other hand, it had cash of kr442.2m and kr223.7m worth of receivables due within a year. So its liabilities total kr1.17b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Enad Global 7 is worth kr2.18b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Enad Global 7 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 Enad Global 7'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 Enad Global 7 wasn't profitable at an EBIT level, but managed to grow its revenue by 169%, to kr1.4b. So there's no doubt that shareholders are cheering for growth

So How Risky Is Enad Global 7?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Enad Global 7 had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr59m and booked a kr176m accounting loss. With only kr35.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Enad Global 7's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Enad Global 7 (of which 1 shouldn't be ignored!) you should know about.

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.

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.

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