Energy Focus (NASDAQ:EFOI) Is Making Moderate Use Of 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Energy Focus, Inc. (NASDAQ:EFOI) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Energy Focus

How Much Debt Does Energy Focus Carry?

As you can see below, Energy Focus had US$3.01m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$2.57m in cash offsetting this, leading to net debt of about US$438.0k.

A Look At Energy Focus' Liabilities

The latest balance sheet data shows that Energy Focus had liabilities of US$11.0m due within a year, and liabilities of US$906.0k falling due after that. Offsetting these obligations, it had cash of US$2.57m as well as receivables valued at US$3.37m due within 12 months. So its liabilities total US$5.99m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Energy Focus has a market capitalization of US$21.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Energy Focus'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.

Over 12 months, Energy Focus reported revenue of US$17m, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Energy Focus still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$4.5m. 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. However, it doesn't help that it burned through US$2.1m of cash over the last year. 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. To that end, you should be aware of the 4 warning signs we've spotted with Energy Focus .

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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