Is Eo2 Société Anonyme (EPA:ALEO2) Using Too Much 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 Eo2 Société Anonyme (EPA:ALEO2) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Eo2 Société Anonyme

What Is Eo2 Société Anonyme's Net Debt?

The image below, which you can click on for greater detail, shows that Eo2 Société Anonyme had debt of €8.19m at the end of August 2021, a reduction from €15.9m over a year. However, its balance sheet shows it holds €10.2m in cash, so it actually has €1.97m net cash.

How Healthy Is Eo2 Société Anonyme's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eo2 Société Anonyme had liabilities of €14.5m due within 12 months and liabilities of €4.54m due beyond that. Offsetting these obligations, it had cash of €10.2m as well as receivables valued at €5.01m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.86m.

This deficit isn't so bad because Eo2 Société Anonyme is worth €11.8m, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, Eo2 Société Anonyme also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Eo2 Société Anonyme's EBIT fell a jaw-dropping 92% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is Eo2 Société Anonyme's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Eo2 Société Anonyme has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Eo2 Société Anonyme actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Eo2 Société Anonyme does have more liabilities than liquid assets, it also has net cash of €1.97m. The cherry on top was that in converted 141% of that EBIT to free cash flow, bringing in -€529k. So although we see some areas for improvement, we're not too worried about Eo2 Société Anonyme's balance sheet. 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. Be aware that Eo2 Société Anonyme is showing 4 warning signs in our investment analysis , you should know about...

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.