Is Ecolumber (BDM:ECO) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ecolumber, S.A. (BDM:ECO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ecolumber

How Much Debt Does Ecolumber Carry?

As you can see below, at the end of December 2020, Ecolumber had €11.5m of debt, up from €10.4m a year ago. Click the image for more detail. However, it also had €822.0k in cash, and so its net debt is €10.6m.

A Look At Ecolumber's Liabilities

Zooming in on the latest balance sheet data, we can see that Ecolumber had liabilities of €8.67m due within 12 months and liabilities of €10.8m due beyond that. Offsetting this, it had €822.0k in cash and €2.52m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €16.1m.

This deficit isn't so bad because Ecolumber is worth €28.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ecolumber wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to €16m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Ecolumber had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €3.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 €4.2m 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Ecolumber (1 can't be ignored) you should be aware of.

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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