Here's Why Euroespes (BME:EEP) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Euroespes, S.A. (BME:EEP) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Euroespes

What Is Euroespes's Debt?

As you can see below, at the end of December 2020, Euroespes had €3.28m of debt, up from €2.82m a year ago. Click the image for more detail. However, it does have €2.24m in cash offsetting this, leading to net debt of about €1.03m.

A Look At Euroespes' Liabilities

The latest balance sheet data shows that Euroespes had liabilities of €1.38m due within a year, and liabilities of €2.88m falling due after that. Offsetting these obligations, it had cash of €2.24m as well as receivables valued at €297.7k due within 12 months. So its liabilities total €1.72m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Euroespes has a market capitalization of €4.74m, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 Euroespes's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Euroespes wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to €2.8m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Euroespes produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €349k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €430k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Euroespes is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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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