Is EVS Broadcast Equipment (EBR:EVS) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 EVS Broadcast Equipment SA (EBR:EVS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 as of December 2020 EVS Broadcast Equipment had €5.95m of debt, an increase on €4.74m, over one year. However, its balance sheet shows it holds €52.7m in cash, so it actually has €46.7m net cash.

A Look At EVS Broadcast Equipment's Liabilities

Zooming in on the latest balance sheet data, we can see that EVS Broadcast Equipment had liabilities of €33.6m due within 12 months and liabilities of €15.9m due beyond that. On the other hand, it had cash of €52.7m and €34.0m worth of receivables due within a year. So it actually has €37.1m more liquid assets than total liabilities.

This excess liquidity suggests that EVS Broadcast Equipment is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any 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!

In fact EVS Broadcast Equipment's saving grace is its low debt levels, because its EBIT has tanked 69% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, EVS Broadcast Equipment actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case EVS Broadcast Equipment has €46.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €16m, being 108% of its EBIT. So we don't have any problem with EVS Broadcast Equipment's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for EVS Broadcast Equipment you should know about.

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.

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This article by Simply Wall St is general in nature. 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.
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