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 Enthusiast Gaming Holdings Inc. (TSE:EGLX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Enthusiast Gaming Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that Enthusiast Gaming Holdings had CA$9.37m of debt in March 2022, down from CA$15.7m, one year before. However, its balance sheet shows it holds CA$14.3m in cash, so it actually has CA$4.90m net cash.
A Look At Enthusiast Gaming Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that Enthusiast Gaming Holdings had liabilities of CA$60.6m due within 12 months and liabilities of CA$54.5m due beyond that. On the other hand, it had cash of CA$14.3m and CA$30.1m worth of receivables due within a year. So its liabilities total CA$70.7m more than the combination of its cash and short-term receivables.
Of course, Enthusiast Gaming Holdings has a market capitalization of CA$374.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Enthusiast Gaming Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Enthusiast Gaming 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 Enthusiast Gaming Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 92%, to CA$185m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Enthusiast Gaming Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Enthusiast Gaming Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$24m of cash and made a loss of CA$50m. With only CA$4.90m on the balance sheet, it would appear that its going to need to raise capital again soon. Enthusiast Gaming Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. However, not all investment risk resides within the balance sheet - far from it. For example - Enthusiast Gaming Holdings has 3 warning signs we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
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