Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Enphase Energy, Inc. (NASDAQ: ENPH) uses debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is Enphase Energy’s net debt?
You can click on the graph below for historical figures, but it shows that as of June 2020, Enphase Energy had a debt of US $ 355.4 million, an increase from US $ 102.9 million. , over one year. However, his balance sheet shows that he holds $ 607.3 million in cash, so he actually has $ 251.8 million in net cash.
A look at the responsibilities of Enphase Energy
Zooming in on the latest balance sheet data, we can see that Enphase Energy had a liability of US $ 223.5 million due within 12 months and a liability of US $ 404.2 million beyond. In compensation for these obligations, it had cash of US $ 607.3 million as well as receivables valued at US $ 105.9 million at 12 months. He can therefore take advantage of $ 85.4 million in liquid assets more than total Liabilities.
This fact indicates that Enphase Energy’s balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So while it’s hard to imagine the US $ 11.4 billion company chasing cash, we still think it’s worth watching its balance sheet. Put simply, the fact that Enphase Energy has more cash than debt is arguably a good indication that it can safely manage its debt.
Best of all, Enphase Energy increased its EBIT by 267% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Enphase Energy can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only repay its debts with hard cash, not with book profits. While Enphase Energy has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building. (or erode) this cash balance. Over the past two years, Enphase Energy has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the pace drops at a Daft Punk concert.
While we sympathize with investors who find debt of concern, you should keep in mind that Enphase Energy has net cash of US $ 251.8 million, plus more liquid assets than liabilities. . The icing on the cake is that he converted 109% of that EBIT into free cash flow, bringing in US $ 152 million. So, is Enphase Energy’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Note that Enphase Energy displays 4 warning signs in our investment analysis , and 1 of them concerns …
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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