Health Check: How Prudently Does eDreams ODIGEO (BME:EDR) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 eDreams ODIGEO S.A. (BME:EDR) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for eDreams ODIGEO

What Is eDreams ODIGEO's Net Debt?

You can click the graphic below for the historical numbers, but it shows that eDreams ODIGEO had €416.5m of debt in September 2022, down from €495.3m, one year before. However, it also had €41.2m in cash, and so its net debt is €375.3m.

How Strong Is eDreams ODIGEO's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that eDreams ODIGEO had liabilities of €424.6m due within 12 months and liabilities of €397.0m due beyond that. Offsetting this, it had €41.2m in cash and €46.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €734.4m.

Given this deficit is actually higher than the company's market capitalization of €706.5m, we think shareholders really should watch eDreams ODIGEO's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 eDreams ODIGEO'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.

In the last year eDreams ODIGEO wasn't profitable at an EBIT level, but managed to grow its revenue by 133%, to €534m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though eDreams ODIGEO managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost €35m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of €52m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 1 warning sign for eDreams ODIGEO that you should be aware of.

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.