Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that E2open Parent Holdings, Inc. (NYSE:ETWO) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 May 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$160.2m, its net debt is less, at about US$887.1m.

A Look At E2open Parent Holdings' Liabilities

According to the last reported balance sheet, E2open Parent Holdings had liabilities of US$313.5m due within 12 months, and liabilities of US$1.21b due beyond 12 months. Offsetting these obligations, it had cash of US$160.2m as well as receivables valued at US$119.4m 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$1.49b, 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. 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 made a loss at the EBIT level, and saw its revenue drop to US$626m, which is a fall of 4.0%. That's not what we would hope to see.

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$48m. 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$783m into a profit. So we do think this stock is quite 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 example - E2open Parent Holdings has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.