Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Enovis Corporation (NYSE:ENOV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Enovis
How Much Debt Does Enovis Carry?
As you can see below, Enovis had US$400.0m of debt at June 2023, down from US$449.5m a year prior. However, because it has a cash reserve of US$32.5m, its net debt is less, at about US$367.5m.
How Strong Is Enovis' Balance Sheet?
The latest balance sheet data shows that Enovis had liabilities of US$353.7m due within a year, and liabilities of US$639.1m falling due after that. Offsetting these obligations, it had cash of US$32.5m as well as receivables valued at US$299.0m due within 12 months. So it has liabilities totalling US$661.3m more than its cash and near-term receivables, combined.
Enovis has a market capitalization of US$2.46b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Enovis's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Enovis wasn't profitable at an EBIT level, but managed to grow its revenue by 6.4%, to US$1.6b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Enovis had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$2.0m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$106m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Enovis I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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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.