David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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. 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.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?
The image below, which you can click on for greater detail, shows that at June 2019 Enphase Energy had debt of US$102.9m, up from US$52.0m in one year. However, it does have US$206.0m in cash offsetting this, leading to net cash of US$103.0m.
How Healthy Is Enphase Energy’s Balance Sheet?
According to the last reported balance sheet, Enphase Energy had liabilities of US$143.6m due within 12 months, and liabilities of US$220.6m due beyond 12 months. Offsetting this, it had US$206.0m in cash and US$111.4m in receivables that were due within 12 months. So its liabilities total US$46.9m 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$3.10b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Despite its noteworthy liabilities, Enphase Energy boasts net cash, so it’s fair to say it does not have a heavy debt load!
Notably, Enphase Energy made a loss at the EBIT level, last year, but improved that to positive EBIT of US$35m in the last twelve months. 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 business needs free cash flow to pay off debt; accounting profits just don’t cut it. Enphase Energy may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Enphase Energy generated free cash flow amounting to a very robust 100% of its EBIT, more than we’d expect. That puts it in a very strong position to pay down debt.
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$103.0m. And it impressed us with free cash flow of US$35m, being 100% of its EBIT. So we don’t have any problem with Enphase Energy’s use of debt. We’d be motivated to research the stock further if we found out that Enphase Energy insiders have bought shares recently. If you would too, then you’re in luck, since today we’re sharing our list of reported insider transactions for free.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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