Health Check: How Prudently Does Elior Group (EPA:ELIOR) Use Debt?

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. As with many other companies Elior Group SA (EPA:ELIOR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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. 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 Elior Group

How Much Debt Does Elior Group Carry?

The image below, which you can click on for greater detail, shows that Elior Group had debt of €809.0m at the end of March 2021, a reduction from €1.32b over a year. However, it does have €32.0m in cash offsetting this, leading to net debt of about €777.0m.

A Look At Elior Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Elior Group had liabilities of €1.26b due within 12 months and liabilities of €1.14b due beyond that. Offsetting these obligations, it had cash of €32.0m as well as receivables valued at €597.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.76b.

This deficit casts a shadow over the €1.04b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Elior Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Elior Group'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 Elior Group had a loss before interest and tax, and actually shrunk its revenue by 29%, to €3.4b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Elior Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €218m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €120m in negative free cash flow over the last year. That means it's on the risky side of things. 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. For example, we've discovered 1 warning sign for Elior Group that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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