These 4 Measures Indicate That ecotel communication ag (ETR:E4C) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies ecotel communication ag (ETR:E4C) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ecotel communication ag

What Is ecotel communication ag's Debt?

The image below, which you can click on for greater detail, shows that ecotel communication ag had debt of €3.69m at the end of September 2021, a reduction from €5.94m over a year. However, its balance sheet shows it holds €10.7m in cash, so it actually has €7.03m net cash.

How Strong Is ecotel communication ag's Balance Sheet?

According to the last reported balance sheet, ecotel communication ag had liabilities of €20.3m due within 12 months, and liabilities of €10.2m due beyond 12 months. On the other hand, it had cash of €10.7m and €9.69m worth of receivables due within a year. So it has liabilities totalling €10.1m more than its cash and near-term receivables, combined.

Of course, ecotel communication ag has a market capitalization of €80.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ecotel communication ag boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that ecotel communication ag grew its EBIT by 265% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although ecotel communication ag's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €7.03m. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in €9.1m. So is ecotel communication ag's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that ecotel communication ag is showing 2 warning signs in our investment analysis , you should know about...

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.