Is EchoStar (NASDAQ:SATS) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, EchoStar Corporation (NASDAQ:SATS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for EchoStar

How Much Debt Does EchoStar Carry?

As you can see below, EchoStar had US$1.50b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$1.52b in cash offsetting this, leading to net cash of US$25.1m.

A Look At EchoStar's Liabilities

We can see from the most recent balance sheet that EchoStar had liabilities of US$434.4m falling due within a year, and liabilities of US$2.18b due beyond that. On the other hand, it had cash of US$1.52b and US$230.4m worth of receivables due within a year. So its liabilities total US$867.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$1.42b, so it does suggest shareholders should keep an eye on EchoStar's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, EchoStar boasts net cash, so it's fair to say it does not have a heavy debt load!

Sadly, EchoStar's EBIT actually dropped 2.9% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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 EchoStar's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While EchoStar 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. During the last three years, EchoStar produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although EchoStar's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$25.1m. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in US$183m. So we are not troubled with EchoStar's debt use. 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. To that end, you should learn about the 3 warning signs we've spotted with EchoStar (including 1 which can't be ignored) .

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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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.