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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.