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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Envea Société anonyme (EPA:ALTEV) does use debt in its business. 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 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 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Envea Société anonyme
How Much Debt Does Envea Société anonyme Carry?
The image below, which you can click on for greater detail, shows that at December 2018 Envea Société anonyme had debt of €10.3m, up from €9.08m in one year. But it also has €14.8m in cash to offset that, meaning it has €4.51m net cash.
How Healthy Is Envea Société anonyme's Balance Sheet?
We can see from the most recent balance sheet that Envea Société anonyme had liabilities of €24.8m falling due within a year, and liabilities of €8.90m due beyond that. Offsetting this, it had €14.8m in cash and €37.1m in receivables that were due within 12 months. So it can boast €18.2m more liquid assets than total liabilities.
This excess liquidity suggests that Envea Société anonyme is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Envea Société anonyme has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Envea Société anonyme grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Envea Société anonyme's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.