Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Charge Companies, Inc. (NASDAQ:CRGE) is in debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Charge Enterprises
What is Charge Enterprises net debt?
The image below, which you can click on for more details, shows that as of June 2022, Charge Enterprises had $25.0 million in debt, up from $17.2 million in one year. However, his balance sheet shows that he holds $66.0 million in cash, so he actually has $41.0 million in net cash.
How strong is Charge Enterprises’ balance sheet?
According to the last published balance sheet, Charge Enterprises had liabilities of US$157.9 million due within 12 months and liabilities of US$24.9 million due beyond 12 months. In compensation for these obligations, it had cash of US$66.0 million as well as receivables valued at US$83.3 million and maturing within 12 months. It therefore has liabilities totaling $33.4 million more than its cash and short-term receivables, combined.
Of course, Charge Enterprises has a market capitalization of US$447.4 million, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. While it has liabilities to note, Charge Enterprises also has more cash than debt, so we’re pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when analyzing debt. But it’s future earnings, more than anything, that will determine Charge Enterprises’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Last year, Charge Enterprises was not profitable on an EBIT level, but managed to increase its revenue by 78%, to $580 million. With a little luck, the company will be able to progress towards profitability.
So how risky is Charge Enterprises?
Although Charge Enterprises posted a loss in earnings before interest and taxes (EBIT) over the last twelve months, it generated positive free cash flow of US$11 million. So taking that at face value and given the net cash position, we don’t think the stock is too risky in the near term. A bright spot is that Charge Enterprises is growing revenue quickly, making it easy to sell a growth story and raise capital if needed. But that doesn’t change our view that the stock is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for Charge Enterprises you should know.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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