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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that E2open Parent Holdings, Inc. (NYSE:ETWO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is E2open Parent Holdings's Debt?
As you can see below, E2open Parent Holdings had US$1.05b of debt, at February 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$135.4m, its net debt is less, at about US$913.5m.
How Strong Is E2open Parent Holdings' Balance Sheet?
We can see from the most recent balance sheet that E2open Parent Holdings had liabilities of US$339.0m falling due within a year, and liabilities of US$1.22b due beyond that. Offsetting this, it had US$135.4m in cash and US$166.3m in receivables that were due within 12 months. So its liabilities total US$1.25b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of US$1.65b, so it does suggest shareholders should keep an eye on E2open Parent Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if E2open Parent Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year E2open Parent Holdings had a loss before interest and tax, and actually shrunk its revenue by 2.7%, to US$635m. We would much prefer see growth.
Caveat Emptor
Over the last twelve months E2open Parent Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$38m. 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. For example, we would not want to see a repeat of last year's loss of US$1.1b. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for E2open Parent Holdings that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.