Yahoo Finance Is engage:BDR (ASX:EN1) Using Debt Sensibly?
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.' 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 engage:BDR Limited (ASX:EN1) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for engage:BDR
How Much Debt Does engage:BDR Carry?
The image below, which you can click on for greater detail, shows that engage:BDR had debt of AU$2.32m at the end of December 2020, a reduction from AU$6.81m over a year. However, it does have AU$3.03m in cash offsetting this, leading to net cash of AU$714.1k.
How Healthy Is engage:BDR's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that engage:BDR had liabilities of AU$6.14m due within 12 months and liabilities of AU$87.3k due beyond that. Offsetting these obligations, it had cash of AU$3.03m as well as receivables valued at AU$5.23m due within 12 months. So it actually has AU$2.03m more liquid assets than total liabilities.
This excess liquidity suggests that engage:BDR is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, engage:BDR boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since engage:BDR will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, engage:BDR made a loss at the EBIT level, and saw its revenue drop to AU$15m, which is a fall of 9.9%. That's not what we would hope to see.
So How Risky Is engage:BDR?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months engage:BDR lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$2.0m and booked a AU$6.9m accounting loss. Given it only has net cash of AU$714.1k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 2 warning signs for engage:BDR you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. 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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