Is eMagin (NYSEMKT:EMAN) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that eMagin Corporation (NYSEMKT:EMAN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for eMagin

How Much Debt Does eMagin Carry?

As you can see below, at the end of September 2020, eMagin had US$2.45m of debt, up from US$2.00m a year ago. Click the image for more detail. But it also has US$10.3m in cash to offset that, meaning it has US$7.83m net cash.

How Strong Is eMagin's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that eMagin had liabilities of US$10.7m due within 12 months and liabilities of US$6.00m due beyond that. Offsetting these obligations, it had cash of US$10.3m as well as receivables valued at US$3.21m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.22m.

Having regard to eMagin's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$189.0m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, eMagin boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if eMagin can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, eMagin reported revenue of US$29m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is eMagin?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that eMagin had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$2.7m and booked a US$7.9m accounting loss. With only US$7.83m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 3 warning signs for eMagin you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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