EQS Group (ETR:EQS) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, EQS Group AG (ETR:EQS) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for EQS Group

What Is EQS Group's Debt?

You can click the graphic below for the historical numbers, but it shows that EQS Group had €1.69m of debt in September 2020, down from €13.8m, one year before. But on the other hand it also has €2.66m in cash, leading to a €976.0k net cash position.

A Look At EQS Group's Liabilities

According to the last reported balance sheet, EQS Group had liabilities of €12.5m due within 12 months, and liabilities of €9.15m due beyond 12 months. On the other hand, it had cash of €2.66m and €3.06m worth of receivables due within a year. So its liabilities total €15.9m more than the combination of its cash and short-term receivables.

Since publicly traded EQS Group shares are worth a total of €193.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, EQS Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although EQS Group made a loss at the EBIT level, last year, it was also good to see that it generated €1.1m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if EQS Group 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. EQS Group 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, EQS Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about EQS Group's liabilities, but we can be reassured by the fact it has has net cash of €976.0k. The cherry on top was that in converted 462% of that EBIT to free cash flow, bringing in €5.1m. So we don't think EQS Group's use of debt 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. Take risks, for example - EQS Group has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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