With regard to yesterday's very good financing announcement, I would like to offer some information and clarification about how businesses fund themselves, and how debt-to-equity ratios are calculated.
Growing a business requires capital.
Start-ups require capital to conduct R&D, launch products, hire employees, acquire customers, expand operations etc.
There are numerous ways that a company can raise capital. The most common ways are to raise capital through either equity or debt financing.
The debt-to-equity ratio is a measure of a company's financial leverage. It represents the amount of debt and equity being used to finance the company's activities. The debt-to-equity ratio is calculated by dividing the company's liabilities (debt) by its equity.
When debt is the primary way a company finances its business, it is considered to be highly leveraged. At this point, it should be noted that EDE is not highly leveraged, due to the fact, that up until very recently, just about all of the capital that EDE has required (in order to develop its business), has been raised from the issue of shares (capital raisings). This is called equity financing.
The debt-to-equity ratio is a simple formula to show how the capital has been raised to run a company's business.
The two elements that make up the debt-to-equity formula are:
Total Liabilities: total liabilities represent all of a company's debt,
Total Equity: total equity is calculated by subtracting total liabilities from total assets.
EDE's liabilities and total assets are found on page 14 of their latest balance sheet, which can be found in their Half Yearly Accounts announcement for the period ending 31st of December, 2019.
For the period ending 31st of December, 2019, EDE's total equity was: A$20,051,456.00
For the period ending 31st of December, 2019, EDE's total liabilities (debt) were: A$1,703,483.00
Therefore, for the period ending on the 31st of December, 2019, EDE had a debt-to-equity ratio of 1:1076 (In percentage terms, EDE's percentage of debt is only 8.5% of its equity).
This is a very low and thus excellent debt-to-equity ratio. This is entirely due to the fact that EDE hasn't relied on borrowing to raise capital i.e. up until very recently, they have raised all of their money using capital raisings in order to finance their growth and operations
Even after yesterday's debt financing announcement, EDE's debt-to-equity ratio remains very low, which is excellent news (I will recalculate EDE's new debt-to-equity ratio as soon as I have the latest figures from an updated balance sheet).
Please note: A high debt-to-equity ratio indicates that a business has used debt to finance its growth and operations. For lenders and investors, a high ratio means a riskier investment because the business might not be able to produce enough money to repay its debts.
In light of yesterday's very good financing announcement, EDE is now very well placed to make a positive move forward, providing of course they can produce EdenCrete sales (and some Optiblend sales) to the tune of at least A$2 mliion in this current quarter, and at least A$3 million in the subsequent quarter (which I most certainly believe they will). I am sure that the quarterly that is due within the next 48 hours, will show that EdenCrete sales are already trending in this direction.
Cheers.
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