Stock Analysis

Is Enphase Energy (NASDAQ:ENPH) A Risky Investment?

  •  Updated
NasdaqGM:ENPH
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Enphase Energy, Inc. (NASDAQ:ENPH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Enphase Energy

How Much Debt Does Enphase Energy Carry?

As you can see below, at the end of December 2021, Enphase Energy had US$1.04b of debt, up from US$330.9m a year ago. Click the image for more detail. However, it also had US$1.02b in cash, and so its net debt is US$21.0m.

debt-equity-history-analysis
NasdaqGM:ENPH Debt to Equity History April 1st 2022

How Healthy Is Enphase Energy's Balance Sheet?

We can see from the most recent balance sheet that Enphase Energy had liabilities of US$439.8m falling due within a year, and liabilities of US$1.21b due beyond that. On the other hand, it had cash of US$1.02b and US$359.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$273.2m.

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$27.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Enphase Energy has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt at just 0.084 times EBITDA, it seems Enphase Energy only uses a little bit of leverage. But EBIT was only 5.0 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. One way Enphase Energy could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 18%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Enphase Energy actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that Enphase Energy's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. Looking at the bigger picture, we think Enphase Energy's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Enphase Energy has 4 warning signs we think you should be aware of.

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.

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.

View the Free Analysis