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 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, 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.

Check out our latest analysis for EHang Holdings

What Is EHang Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 EHang Holdings had CN¥144.0m of debt, an increase on CN¥29.8m, over one year. However, it does have CN¥184.1m in cash offsetting this, leading to net cash of CN¥40.1m.

How Strong Is EHang Holdings' Balance Sheet?

According to the last reported balance sheet, EHang Holdings had liabilities of CN¥297.8m due within 12 months, and liabilities of CN¥82.9m due beyond 12 months. Offsetting this, it had CN¥184.1m in cash and CN¥24.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥171.8m.

Given EHang Holdings has a market capitalization of CN¥6.37b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, EHang Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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.

In the last year EHang Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 53%, to CN¥61m. With any luck the company will be able to grow its way to profitability.

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. Indeed, in that time it burnt through CN¥187m of cash and made a loss of CN¥346m. But the saving grace is the CN¥40.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, EHang Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for EHang Holdings (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.

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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.