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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that EchoStar Corporation (NASDAQ:SATS) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for EchoStar

What Is EchoStar's Net Debt?

As you can see below, at the end of December 2024, EchoStar had US$26.5b of debt, up from US$22.6b a year ago. Click the image for more detail. On the flip side, it has US$5.55b in cash leading to net debt of about US$21.0b.

How Strong Is EchoStar's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EchoStar had liabilities of US$5.83b due within 12 months and liabilities of US$34.9b due beyond that. On the other hand, it had cash of US$5.55b and US$1.20b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$33.9b.

This deficit casts a shadow over the US$8.95b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, EchoStar would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine EchoStar'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.

Over 12 months, EchoStar made a loss at the EBIT level, and saw its revenue drop to US$16b, which is a fall of 7.0%. We would much prefer see growth.

Caveat Emptor

Importantly, EchoStar had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$304m. 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$292m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with EchoStar , and understanding them should be part of your investment process.

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.