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 can see that Enertime SA (EPA:ALENE) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Enertime
What Is Enertime's Debt?
The image below, which you can click on for greater detail, shows that Enertime had debt of €241.5k at the end of December 2018, a reduction from €598.1k over a year. But on the other hand it also has €1.42m in cash, leading to a €1.18m net cash position.
How Strong Is Enertime's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Enertime had liabilities of €1.95m due within 12 months and liabilities of €352.5k due beyond that. Offsetting this, it had €1.42m in cash and €1.91m in receivables that were due within 12 months. So it can boast €1.03m more liquid assets than total liabilities.
This surplus suggests that Enertime is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Enertime 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 ultimately the future profitability of the business will decide if Enertime can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Enertime saw its revenue drop to €3.1m, which is a fall of 36%. To be frank that doesn't bode well.
So How Risky Is Enertime?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Enertime lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €451k of cash and made a loss of €1.3m. While this does make the company a bit risky, it's important to remember it has net cash of €1.4m. That means it could keep spending at its current rate for more than two years. 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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Enertime's profit, revenue, and operating cashflow have changed over the last few years.