Here's Why EQS Group (ETR:EQS) Can Afford Some Debt

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.' 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 can see that EQS Group AG (ETR:EQS) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for EQS Group

What Is EQS Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 EQS Group had debt of €37.9m, up from €19.8m in one year. On the flip side, it has €7.03m in cash leading to net debt of about €30.8m.

How Healthy Is EQS Group's Balance Sheet?

According to the last reported balance sheet, EQS Group had liabilities of €47.9m due within 12 months, and liabilities of €21.6m due beyond 12 months. Offsetting these obligations, it had cash of €7.03m as well as receivables valued at €7.08m due within 12 months. So it has liabilities totalling €55.4m more than its cash and near-term receivables, combined.

EQS Group has a market capitalization of €242.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, EQS Group reported revenue of €60m, which is a gain of 37%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, EQS Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €6.1m at the EBIT level. 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. Another cause for caution is that is bled €93k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for EQS Group that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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