Here's Why EVS Broadcast Equipment (EBR:EVS) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that EVS Broadcast Equipment SA (EBR:EVS) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for EVS Broadcast Equipment

What Is EVS Broadcast Equipment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that EVS Broadcast Equipment had €2.38m of debt in December 2020, down from €4.74m, one year before. However, its balance sheet shows it holds €52.8m in cash, so it actually has €50.4m net cash.

A Look At EVS Broadcast Equipment's Liabilities

We can see from the most recent balance sheet that EVS Broadcast Equipment had liabilities of €33.6m falling due within a year, and liabilities of €15.9m due beyond that. Offsetting these obligations, it had cash of €52.8m as well as receivables valued at €36.7m due within 12 months. So it can boast €40.0m more liquid assets than total liabilities.

This surplus suggests that EVS Broadcast Equipment is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, EVS Broadcast Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that EVS Broadcast Equipment's load is not too heavy, because its EBIT was down 75% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if EVS Broadcast Equipment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. EVS Broadcast Equipment may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, EVS Broadcast Equipment actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case EVS Broadcast Equipment has €50.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €11m, being 103% of its EBIT. So we don't have any problem with EVS Broadcast Equipment's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for EVS Broadcast Equipment 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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