Is Elior Group (EPA:ELIOR) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Elior Group SA (EPA:ELIOR) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Elior Group

What Is Elior Group's Debt?

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

We can see from the most recent balance sheet that Elior Group had liabilities of €1.26b falling due within a year, and liabilities of €1.14b due beyond that. Offsetting this, it had €32.0m in cash and €597.0m in receivables that were due within 12 months. So its liabilities total €1.76b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €1.20b 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. 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. To be frank that doesn't bode well.

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). Indeed, it lost a very considerable €218m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Elior Group that you should be aware of.

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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