These 4 Measures Indicate That Eo2 Société Anonyme (EPA:ALEO2) Is Using Debt Extensively

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.' 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, Eo2 Société Anonyme (EPA:ALEO2) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 at February 2021 Eo2 Société Anonyme had debt of €9.53m, up from €9.11m in one year. But it also has €11.5m in cash to offset that, meaning it has €1.97m net cash.

A Look At Eo2 Société Anonyme's Liabilities

Zooming in on the latest balance sheet data, we can see that Eo2 Société Anonyme had liabilities of €7.53m due within 12 months and liabilities of €12.5m due beyond that. Offsetting these obligations, it had cash of €11.5m as well as receivables valued at €5.04m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.48m.

While this might seem like a lot, it is not so bad since Eo2 Société Anonyme has a market capitalization of €11.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 72% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Eo2 Société Anonyme will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. And it impressed us with free cash flow of €440k, being 173% of its EBIT. So while Eo2 Société Anonyme does not have a great balance sheet, it's certainly not too bad. 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 6 warning signs for Eo2 Société Anonyme (1 is a bit concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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