These 4 Measures Indicate That Enphase Energy (NASDAQ:ENPH) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Enphase Energy, Inc. (NASDAQ:ENPH) makes use of 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. 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. 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.

View our latest analysis for Enphase Energy

How Much Debt Does Enphase Energy Carry?

The chart below, which you can click on for greater detail, shows that Enphase Energy had US$1.29b in debt in September 2023; about the same as the year before. But on the other hand it also has US$1.78b in cash, leading to a US$492.3m net cash position.

A Look At Enphase Energy's Liabilities

The latest balance sheet data shows that Enphase Energy had liabilities of US$774.4m due within a year, and liabilities of US$1.76b falling due after that. Offsetting these obligations, it had cash of US$1.78b as well as receivables valued at US$599.8m due within 12 months. So its liabilities total US$155.6m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Enphase Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$15.7b company is struggling for cash, we still think it's worth monitoring its 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 addition to that, we're happy to report that Enphase Energy has boosted its EBIT by 74%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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. 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. 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.

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$492.3m. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in US$808m. So is Enphase Energy's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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.