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

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.' 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. As with many other companies EHang Holdings Limited (NASDAQ:EH) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 EHang Holdings

What Is EHang Holdings's Net Debt?

As you can see below, EHang Holdings had CN¥29.8m of debt at March 2022, down from CN¥35.0m a year prior. However, its balance sheet shows it holds CN¥236.9m in cash, so it actually has CN¥207.1m net cash.

How Healthy Is EHang Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EHang Holdings had liabilities of CN¥149.8m due within 12 months and liabilities of CN¥23.4m due beyond that. Offsetting this, it had CN¥236.9m in cash and CN¥53.8m in receivables that were due within 12 months. So it actually has CN¥117.6m 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 it is future earnings, more than anything, that will determine EHang Holdings'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, EHang Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥40m, which is a fall of 78%. To be frank that doesn't bode well.

So How Risky Is EHang Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that EHang Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥137m of cash and made a loss of CN¥320m. But the saving grace is the CN¥207.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for EHang Holdings you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.