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Is Enphase Energy (NASDAQ:ENPH) A Risky Investment?

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.' 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 note that Enphase Energy, Inc. (NASDAQ:ENPH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Enphase Energy

How Much Debt Does Enphase Energy Carry?

As you can see below, at the end of September 2022, Enphase Energy had US$1.29b of debt, up from US$1.03b a year ago. Click the image for more detail. However, it does have US$1.42b in cash offsetting this, leading to net cash of US$129.0m.


How Strong Is Enphase Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Enphase Energy had liabilities of US$550.2m due within 12 months and liabilities of US$1.54b due beyond that. Offsetting these obligations, it had cash of US$1.42b as well as receivables valued at US$396.6m due within 12 months. So it has liabilities totalling US$273.9m more than its cash and near-term receivables, combined.

Having regard to Enphase Energy's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$30.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Enphase Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Enphase Energy grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Enphase Energy actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Enphase Energy's liabilities, but we can be reassured by the fact it has has net cash of US$129.0m. And it impressed us with free cash flow of US$545m, being 141% of its EBIT. 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. For instance, we've identified 1 warning sign for Enphase Energy that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

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