Is Ecolumber (BDM:ECO) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Ecolumber, S.A. (BDM:ECO) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 Ecolumber

What Is Ecolumber's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Ecolumber had debt of €11.4m, up from €6.44m in one year. However, because it has a cash reserve of €1.57m, its net debt is less, at about €9.85m.

How Strong Is Ecolumber's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ecolumber had liabilities of €8.12m due within 12 months and liabilities of €12.0m due beyond that. Offsetting these obligations, it had cash of €1.57m as well as receivables valued at €1.92m due within 12 months. So its liabilities total €16.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Ecolumber has a market capitalization of €28.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ecolumber's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Ecolumber wasn't profitable at an EBIT level, but managed to grow its revenue by 168%, to €16m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though Ecolumber managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping €3.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €7.2m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Ecolumber has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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