Is Elecnor (BME:ENO) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Elecnor, S.A. (BME:ENO) does use debt in its business. But the real question is whether this debt is making the company risky.

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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 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Elecnor Carry?

As you can see below, Elecnor had €270.3m of debt at December 2024, down from €668.4m a year prior. But on the other hand it also has €429.0m in cash, leading to a €158.7m net cash position.

How Strong Is Elecnor's Balance Sheet?

The latest balance sheet data shows that Elecnor had liabilities of €2.17b due within a year, and liabilities of €269.1m falling due after that. Offsetting these obligations, it had cash of €429.0m as well as receivables valued at €1.78b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €234.8m.

Given Elecnor has a market capitalization of €1.85b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Elecnor boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Elecnor's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

View our latest analysis for Elecnor

In the last year Elecnor wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to €3.8b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Elecnor?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Elecnor had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €2.4m and booked a €123m accounting loss. With only €158.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Elecnor's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For instance, we've identified 2 warning signs for Elecnor (1 is significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.