Energía Innovación y Desarrollo Fotovoltaico (BME:EIDF) Is Making Moderate Use Of 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 Energía, Innovación y Desarrollo Fotovoltaico, S.A. (BME:EIDF) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Energía Innovación y Desarrollo Fotovoltaico Carry?

As you can see below, Energía Innovación y Desarrollo Fotovoltaico had €21.6m of debt at December 2024, down from €34.9m a year prior. However, it does have €6.42m in cash offsetting this, leading to net debt of about €15.2m.

A Look At Energía Innovación y Desarrollo Fotovoltaico's Liabilities

The latest balance sheet data shows that Energía Innovación y Desarrollo Fotovoltaico had liabilities of €91.0m due within a year, and liabilities of €28.8m falling due after that. Offsetting this, it had €6.42m in cash and €36.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €76.4m.

Energía Innovación y Desarrollo Fotovoltaico has a market capitalization of €234.1m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Energía Innovación y Desarrollo Fotovoltaico will need earnings to service that debt. 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.

See our latest analysis for Energía Innovación y Desarrollo Fotovoltaico

Over 12 months, Energía Innovación y Desarrollo Fotovoltaico made a loss at the EBIT level, and saw its revenue drop to €140m, which is a fall of 33%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Energía Innovación y Desarrollo Fotovoltaico's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €2.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €26m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Energía Innovación y Desarrollo Fotovoltaico you should be aware of, and 2 of them are a bit unpleasant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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