eDreams ODIGEO (BME:EDR) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that eDreams ODIGEO S.A. (BME:EDR) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 as of December 2020 eDreams ODIGEO had €503.0m of debt, an increase on €432.2m, over one year. On the flip side, it has €18.5m in cash leading to net debt of about €484.5m.

How Healthy Is eDreams ODIGEO's Balance Sheet?

The latest balance sheet data shows that eDreams ODIGEO had liabilities of €189.3m due within a year, and liabilities of €522.6m falling due after that. Offsetting these obligations, it had cash of €18.5m as well as receivables valued at €26.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €666.7m.

When you consider that this deficiency exceeds the company's €589.7m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive 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 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 had a loss before interest and tax, and actually shrunk its revenue by 66%, to €205m. To be frank that doesn't bode well.

Caveat Emptor

Not only did eDreams ODIGEO's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €42m 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. Not least because it burned through €88m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. Case in point: We've spotted 3 warning signs for eDreams ODIGEO 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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