Yahoo Finance Does Enthusiast Gaming Holdings (TSE:EGLX) Have A Healthy Balance Sheet?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Enthusiast Gaming Holdings Inc. (TSE:EGLX) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
View our latest analysis for Enthusiast Gaming Holdings
What Is Enthusiast Gaming Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that Enthusiast Gaming Holdings had CA$10.0m of debt in June 2021, down from CA$28.9m, one year before. But on the other hand it also has CA$53.9m in cash, leading to a CA$43.9m net cash position.
A Look At Enthusiast Gaming Holdings' Liabilities
We can see from the most recent balance sheet that Enthusiast Gaming Holdings had liabilities of CA$29.4m falling due within a year, and liabilities of CA$27.8m due beyond that. Offsetting these obligations, it had cash of CA$53.9m as well as receivables valued at CA$22.8m due within 12 months. So it can boast CA$19.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Enthusiast Gaming Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Enthusiast Gaming Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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 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 377%, to CA$126m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Enthusiast Gaming Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Enthusiast Gaming Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$24m of cash and made a loss of CA$41m. With only CA$43.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Enthusiast Gaming Holdings's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 instance, we've identified 3 warning signs for Enthusiast Gaming Holdings (1 is a bit unpleasant) you should be aware of.
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.
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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