Does Ecoslops (EPA:ALESA) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Ecoslops S.A. (EPA:ALESA) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ecoslops

What Is Ecoslops's Net Debt?

As you can see below, at the end of December 2020, Ecoslops had €26.6m of debt, up from €11.9m a year ago. Click the image for more detail. However, it does have €7.96m in cash offsetting this, leading to net debt of about €18.6m.

A Look At Ecoslops' Liabilities

According to the last reported balance sheet, Ecoslops had liabilities of €4.71m due within 12 months, and liabilities of €26.8m due beyond 12 months. Offsetting these obligations, it had cash of €7.96m as well as receivables valued at €2.27m due within 12 months. So it has liabilities totalling €21.3m more than its cash and near-term receivables, combined.

Ecoslops has a market capitalization of €47.8m, so it could very likely raise cash to ameliorate 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ecoslops can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ecoslops made a loss at the EBIT level, and saw its revenue drop to €7.1m, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ecoslops's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €4.6m. 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. However, it doesn't help that it burned through €10m of cash over the last year. 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 example, we've discovered 2 warning signs for Ecoslops (1 can't be ignored!) that you should be aware of before investing here.

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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