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

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 can see that Enphase Energy, Inc. (NASDAQ:ENPH) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Enphase Energy

How Much Debt Does Enphase Energy Carry?

As you can see below, Enphase Energy had US$1.30b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$1.63b in cash offsetting this, leading to net cash of US$333.7m.

How Healthy Is Enphase Energy's Balance Sheet?

According to the last reported balance sheet, Enphase Energy had liabilities of US$554.1m due within 12 months, and liabilities of US$1.76b due beyond 12 months. Offsetting this, it had US$1.63b in cash and US$405.3m in receivables that were due within 12 months. So it has liabilities totalling US$275.4m more than its cash and near-term receivables, combined.

Having regard to Enphase Energy's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$14.3b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Enphase Energy also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Enphase Energy's saving grace is its low debt levels, because its EBIT has tanked 53% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Enphase Energy's liabilities, but we can be reassured by the fact it has has net cash of US$333.7m. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in US$404m. So we don't have any problem with Enphase Energy's use of debt. 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. For example, we've discovered 1 warning sign for Enphase Energy that you should be aware of before investing here.

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.

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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.

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