Is Euromedis Groupe (EPA:ALEMG) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Euromedis Groupe (EPA:ALEMG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Euromedis Groupe

What Is Euromedis Groupe's Net Debt?

As you can see below, at the end of June 2020, Euromedis Groupe had €17.9m of debt, up from €14.7m a year ago. Click the image for more detail. But on the other hand it also has €21.1m in cash, leading to a €3.18m net cash position.

How Healthy Is Euromedis Groupe's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Euromedis Groupe had liabilities of €31.4m due within 12 months and liabilities of €56.3m due beyond that. Offsetting these obligations, it had cash of €21.1m as well as receivables valued at €37.4m due within 12 months. So it has liabilities totalling €29.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €38.7m, so it does suggest shareholders should keep an eye on Euromedis Groupe's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Euromedis Groupe also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Euromedis Groupe turned things around in the last 12 months, delivering and EBIT of €4.2m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Euromedis Groupe's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Euromedis Groupe 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, Euromedis Groupe actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Euromedis Groupe does have more liabilities than liquid assets, it also has net cash of €3.18m. The cherry on top was that in converted 353% of that EBIT to free cash flow, bringing in €15m. So we don't have any problem with Euromedis Groupe's use of debt. 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 instance, we've identified 4 warning signs for Euromedis Groupe that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

When trading Euromedis Groupe or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.