Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Enphase Energy, Inc. (NASDAQ:ENPH) makes use of 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 incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Enphase Energy's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Enphase Energy had US$355.4m of debt, an increase on US$102.9m, over one year. However, its balance sheet shows it holds US$607.3m in cash, so it actually has US$251.8m net cash.
A Look At Enphase Energy's Liabilities
Zooming in on the latest balance sheet data, we can see that Enphase Energy had liabilities of US$223.5m due within 12 months and liabilities of US$404.2m due beyond that. Offsetting these obligations, it had cash of US$607.3m as well as receivables valued at US$105.9m due within 12 months. So it can boast US$85.4m more liquid assets than total liabilities.
This state of affairs indicates that Enphase Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$11.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Enphase Energy has more cash than debt is arguably a good indication that it can manage its debt safely.
Better yet, Enphase Energy grew its EBIT by 267% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Enphase Energy 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Enphase Energy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Enphase Energy actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that Enphase Energy has net cash of US$251.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in US$152m. So is Enphase Energy's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Enphase Energy is showing 4 warning signs in our investment analysis , and 1 of those is concerning...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.