Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Eagle Eye Solutions Group plc (LON:EYE) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Eagle Eye Solutions Group Carry?
The image below, which you can click on for greater detail, shows that at December 2018 Eagle Eye Solutions Group had debt of UK£2.40m, up from none in one year. However, because it has a cash reserve of UK£630.0k, its net debt is less, at about UK£1.77m.
How Healthy Is Eagle Eye Solutions Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Eagle Eye Solutions Group had liabilities of UK£9.47m due within 12 months and liabilities of UK£616.0k due beyond that. Offsetting these obligations, it had cash of UK£630.0k as well as receivables valued at UK£6.57m due within 12 months. So it has liabilities totalling UK£2.89m more than its cash and near-term receivables, combined.
Of course, Eagle Eye Solutions Group has a market capitalization of UK£44.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Eagle Eye Solutions Group'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.
Over 12 months, Eagle Eye Solutions Group reported revenue of UK£17m, which is a gain of 36%. With any luck the company will be able to grow its way to profitability.
Even though Eagle Eye Solutions Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost UK£3.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled UK£2.4m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Eagle Eye Solutions Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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 email@example.com. 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.