EHang Holdings (NASDAQ:EH) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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, EHang Holdings Limited (NASDAQ:EH) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for EHang Holdings

How Much Debt Does EHang Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 EHang Holdings had CN¥30.0m of debt, an increase on CN¥15.0m, over one year. But it also has CN¥357.0m in cash to offset that, meaning it has CN¥327.0m net cash.

How Healthy Is EHang Holdings' Balance Sheet?

According to the last reported balance sheet, EHang Holdings had liabilities of CN¥118.6m due within 12 months, and liabilities of CN¥68.2m due beyond 12 months. Offsetting this, it had CN¥357.0m in cash and CN¥95.8m in receivables that were due within 12 months. So it can boast CN¥266.1m more liquid assets than total liabilities.

This surplus suggests that EHang Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, EHang Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if EHang Holdings 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.

In the last year EHang Holdings had a loss before interest and tax, and actually shrunk its revenue by 43%, to CN¥103m. To be frank that doesn't bode well.

So How Risky Is EHang Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year EHang Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥141m and booked a CN¥258m accounting loss. But the saving grace is the CN¥327.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 2 warning signs with EHang Holdings , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.