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 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, E2open Parent Holdings, Inc. (NYSE:ETWO) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does E2open Parent Holdings Carry?
As you can see below, E2open Parent Holdings had US$1.05b of debt, at November 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$110.3m in cash offsetting this, leading to net debt of about US$939.8m.
How Healthy Is E2open Parent Holdings' Balance Sheet?
According to the last reported balance sheet, E2open Parent Holdings had liabilities of US$300.4m due within 12 months, and liabilities of US$1.21b due beyond 12 months. Offsetting these obligations, it had cash of US$110.3m as well as receivables valued at US$132.0m due within 12 months. So its liabilities total US$1.27b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of US$1.28b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine E2open Parent Holdings'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, E2open Parent Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
Caveat Emptor
Importantly, E2open Parent Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$26m 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. We would feel better if it turned its trailing twelve month loss of US$1.3b into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for E2open Parent Holdings 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.
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