Here's Why ecotel communication ag (ETR:E4C) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that ecotel communication ag (ETR:E4C) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ecotel communication ag

What Is ecotel communication ag's Net Debt?

The image below, which you can click on for greater detail, shows that ecotel communication ag had debt of €5.94m at the end of September 2020, a reduction from €7.44m over a year. However, it does have €7.45m in cash offsetting this, leading to net cash of €1.52m.

How Strong Is ecotel communication ag's Balance Sheet?

The latest balance sheet data shows that ecotel communication ag had liabilities of €17.3m due within a year, and liabilities of €14.1m falling due after that. Offsetting this, it had €7.45m in cash and €8.14m in receivables that were due within 12 months. So its liabilities total €15.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because ecotel communication ag is worth €49.5m, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, ecotel communication ag also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is well worth noting that ecotel communication ag's EBIT shot up like bamboo after rain, gaining 49% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But it is ecotel communication ag's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ecotel communication ag has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, ecotel communication ag actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While ecotel communication ag does have more liabilities than liquid assets, it also has net cash of €1.52m. And it impressed us with free cash flow of €3.1m, being 101% of its EBIT. So we don't think ecotel communication ag'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. For instance, we've identified 3 warning signs for ecotel communication ag (1 can't be ignored) you should be aware of.

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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