Health Check: How Prudently Does EHang Holdings (NASDAQ:EH) Use Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that EHang Holdings Limited (NASDAQ:EH) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for EHang Holdings

What Is EHang Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that EHang Holdings had debt of CN¥30.0m at the end of June 2021, a reduction from CN¥41.1m over a year. However, its balance sheet shows it holds CN¥406.5m in cash, so it actually has CN¥376.5m net cash.

How Strong Is EHang Holdings' Balance Sheet?

According to the last reported balance sheet, EHang Holdings had liabilities of CN¥124.3m due within 12 months, and liabilities of CN¥68.4m due beyond 12 months. Offsetting this, it had CN¥406.5m in cash and CN¥111.8m in receivables that were due within 12 months. So it actually has CN¥325.6m more liquid assets than total liabilities.

This short term liquidity is a sign that EHang Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, EHang Holdings reported revenue of CN¥161m, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is EHang Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months EHang Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥141m and booked a CN¥186m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥376.5m. That means it could keep spending at its current rate for more than two years. 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. Be aware that EHang Holdings is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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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