Is ecotel communication ag (ETR:E4C) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 ecotel communication ag (ETR:E4C) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 the opportunities and risks within the DE Telecom industry.

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 €1.88m at the end of June 2022, a reduction from €4.29m over a year. But on the other hand it also has €25.8m in cash, leading to a €23.9m net cash position.

How Strong Is ecotel communication ag's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ecotel communication ag had liabilities of €26.2m due within 12 months and liabilities of €8.46m due beyond that. Offsetting these obligations, it had cash of €25.8m as well as receivables valued at €14.4m due within 12 months. So it can boast €5.54m more liquid assets than total liabilities.

This surplus suggests that ecotel communication ag has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ecotel communication ag has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, ecotel communication ag grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle its debt. 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 ecotel communication ag 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. ecotel communication ag 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, ecotel communication ag actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case ecotel communication ag has €23.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 172% of that EBIT to free cash flow, bringing in €24m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with ecotel communication ag (at least 1 which is significant) , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.