Here's Why Enovis (NYSE:ENOV) Can Afford Some Debt

Warren Buffett famously said, '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 Enovis Corporation (NYSE:ENOV) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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 Enovis

How Much Debt Does Enovis Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Enovis had US$1.34b of debt, an increase on US$285.0m, over one year. However, because it has a cash reserve of US$66.3m, its net debt is less, at about US$1.27b.

How Strong Is Enovis' Balance Sheet?

According to the last reported balance sheet, Enovis had liabilities of US$549.1m due within 12 months, and liabilities of US$1.62b due beyond 12 months. Offsetting these obligations, it had cash of US$66.3m as well as receivables valued at US$381.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.72b.

This deficit is considerable relative to its market capitalization of US$2.64b, so it does suggest shareholders should keep an eye on Enovis' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Enovis'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.

In the last year Enovis wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$1.8b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Enovis produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$2.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$37m of cash over the last year. So to be blunt we think it is risky. For riskier companies like Enovis I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.