ENGlobal (NASDAQ:ENG) 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 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 note that ENGlobal Corporation (NASDAQ:ENG) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that ENG is potentially overvalued!

What Is ENGlobal's Debt?

As you can see below, at the end of September 2022, ENGlobal had US$1.57m of debt, up from US$1.38m a year ago. Click the image for more detail. But it also has US$9.66m in cash to offset that, meaning it has US$8.09m net cash.

A Look At ENGlobal's Liabilities

Zooming in on the latest balance sheet data, we can see that ENGlobal had liabilities of US$11.5m due within 12 months and liabilities of US$8.80m due beyond that. Offsetting this, it had US$9.66m in cash and US$17.9m in receivables that were due within 12 months. So it actually has US$7.26m more liquid assets than total liabilities.

It's good to see that ENGlobal has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that ENGlobal has more cash than debt is arguably a good indication that it can manage its debt safely. 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 ENGlobal can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, ENGlobal made a loss at the EBIT level, and saw its revenue drop to US$39m, which is a fall of 5.8%. That's not what we would hope to see.

So How Risky Is ENGlobal?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year ENGlobal had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$14m and booked a US$11m accounting loss. Given it only has net cash of US$8.09m, the company may need to raise more capital if it doesn't reach break-even soon. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with ENGlobal (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.