Health Check: How Prudently Does EchoStar (NASDAQ:SATS) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that EchoStar Corporation (NASDAQ:SATS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for EchoStar

How Much Debt Does EchoStar Carry?

As you can see below, at the end of September 2024, EchoStar had US$24.0b of debt, up from US$1.50b a year ago. Click the image for more detail. On the flip side, it has US$674.4m in cash leading to net debt of about US$23.3b.

A Look At EchoStar's Liabilities

We can see from the most recent balance sheet that EchoStar had liabilities of US$7.48b falling due within a year, and liabilities of US$30.6b due beyond that. Offsetting these obligations, it had cash of US$674.4m as well as receivables valued at US$1.10b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$36.3b.

This deficit casts a shadow over the US$7.31b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, EchoStar would probably need a major re-capitalization if its creditors were to demand repayment. 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 EchoStar can strengthen its balance sheet over time. 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 EchoStar had a loss before interest and tax, and actually shrunk its revenue by 47%, to US$16b. That makes us nervous, to say the least.

Caveat Emptor

While EchoStar's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$336m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$150m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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 1 warning sign for EchoStar you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.