Is eDreams ODIGEO (BME:EDR) Weighed On By Its Debt Load?

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. As with many other companies eDreams ODIGEO S.A. (BME:EDR) makes use of debt. But is this debt a concern to shareholders?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for eDreams ODIGEO

What Is eDreams ODIGEO's Net Debt?

As you can see below, eDreams ODIGEO had €388.3m of debt at March 2023, down from €418.9m a year prior. However, it also had €35.9m in cash, and so its net debt is €352.3m.

How Strong Is eDreams ODIGEO's Balance Sheet?

According to the last reported balance sheet, eDreams ODIGEO had liabilities of €441.0m due within 12 months, and liabilities of €396.6m due beyond 12 months. On the other hand, it had cash of €35.9m and €72.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €729.1m.

When you consider that this deficiency exceeds the company's €697.3m market capitalization, you might well be inclined to review the balance sheet intently. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if eDreams ODIGEO 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.

In the last year eDreams ODIGEO wasn't profitable at an EBIT level, but managed to grow its revenue by 48%, to €588m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, eDreams ODIGEO still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €9.8m. 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 €43m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how eDreams ODIGEO's profit, revenue, and operating cashflow have changed over the last few years.

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.