Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Envision Solar International, Inc. (NASDAQ:EVSI) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.
How Much Debt Does Envision Solar International Carry?
You can click the graphic below for the historical numbers, but it shows that Envision Solar International had US$215.6k of debt in June 2019, down from US$2.10m, one year before. But it also has US$5.92m in cash to offset that, meaning it has US$5.70m net cash.
How Strong Is Envision Solar International's Balance Sheet?
The latest balance sheet data shows that Envision Solar International had liabilities of US$2.31m due within a year, and liabilities of US$292.1k falling due after that. On the other hand, it had cash of US$5.92m and US$1.37m worth of receivables due within a year. So it can boast US$4.68m more liquid assets than total liabilities.
It's good to see that Envision Solar International has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Envision Solar International boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Envision Solar International 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.
Over 12 months, Envision Solar International reported revenue of US$5.3m, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Envision Solar International?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Envision Solar International lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$4.0m and booked a US$3.7m accounting loss. However, it has net cash of US$5.70m, so it has a bit of time before it will need more capital. Envision Solar International's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 Envision Solar International's profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.