Does Enphase Energy (NASDAQ:ENPH) Have A Healthy Balance Sheet?

December 25, 2021
  •  Updated
April 01, 2022
NasdaqGM:ENPH
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Enphase Energy, Inc. (NASDAQ:ENPH) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Enphase Energy

What Is Enphase Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Enphase Energy had US$1.03b of debt, an increase on US$360.1m, over one year. However, it does have US$1.39b in cash offsetting this, leading to net cash of US$367.8m.

debt-equity-history-analysis
NasdaqGM:ENPH Debt to Equity History December 25th 2021

How Healthy Is Enphase Energy's Balance Sheet?

We can see from the most recent balance sheet that Enphase Energy had liabilities of US$393.5m falling due within a year, and liabilities of US$1.19b due beyond that. Offsetting these obligations, it had cash of US$1.39b as well as receivables valued at US$295.5m due within 12 months. So it actually has US$107.2m more liquid assets than total liabilities.

Having regard to Enphase Energy's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$25.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Enphase Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Enphase Energy grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. 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 Enphase Energy'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Enphase Energy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Enphase Energy actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Enphase Energy has net cash of US$367.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in US$291m. So we don't think Enphase Energy's use of debt is risky. 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. We've identified 5 warning signs with Enphase Energy , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Valuation is complex, but we're helping make it simple.

Find out whether Enphase Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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