Is E2open Parent Holdings (NYSE:ETWO) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, E2open Parent Holdings, Inc. (NYSE:ETWO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 E2open Parent Holdings

What Is E2open Parent Holdings's Debt?

The chart below, which you can click on for greater detail, shows that E2open Parent Holdings had US$1.05b in debt in November 2023; about the same as the year before. However, it also had US$110.3m in cash, and so its net debt is US$939.8m.

How Healthy Is E2open Parent Holdings' Balance Sheet?

We can see from the most recent balance sheet that E2open Parent Holdings had liabilities of US$300.4m falling due within a year, and liabilities of US$1.21b due beyond that. Offsetting these obligations, it had cash of US$110.3m as well as receivables valued at US$132.0m due within 12 months. So its liabilities total US$1.27b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$1.28b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine E2open Parent Holdings'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.

In the last year E2open Parent Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, E2open Parent Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$26m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$1.3b into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with E2open Parent Holdings .

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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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.