Health Check: How Prudently Does Charge Enterprises (NASDAQ:CRGE) Use Debt?

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.' 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 Charge Enterprises, Inc. (NASDAQ:CRGE) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Charge Enterprises

What Is Charge Enterprises's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Charge Enterprises had debt of US$24.9m, up from US$18.5m in one year. However, its balance sheet shows it holds US$47.3m in cash, so it actually has US$22.4m net cash.

A Look At Charge Enterprises' Liabilities

We can see from the most recent balance sheet that Charge Enterprises had liabilities of US$116.5m falling due within a year, and liabilities of US$25.1m due beyond that. Offsetting these obligations, it had cash of US$47.3m as well as receivables valued at US$82.8m due within 12 months. So its liabilities total US$11.5m more than the combination of its cash and short-term receivables.

Given Charge Enterprises has a market capitalization of US$260.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Charge Enterprises 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 it is future earnings, more than anything, that will determine Charge Enterprises'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.

Over 12 months, Charge Enterprises reported revenue of US$649m, which is a gain of 47%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Charge Enterprises?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Charge Enterprises had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$9.4m of cash and made a loss of US$78m. Given it only has net cash of US$22.4m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Charge Enterprises may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Charge Enterprises is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.