Eurasia Fonciere Investissements Société Anonyme (EPA:EFI) Has No Shortage Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Eurasia Fonciere Investissements Société Anonyme (EPA:EFI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Eurasia Fonciere Investissements Société Anonyme

What Is Eurasia Fonciere Investissements Société Anonyme's Debt?

As you can see below, at the end of December 2022, Eurasia Fonciere Investissements Société Anonyme had €13.2m of debt, up from €7.99m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

A Look At Eurasia Fonciere Investissements Société Anonyme's Liabilities

According to the last reported balance sheet, Eurasia Fonciere Investissements Société Anonyme had liabilities of €8.71m due within 12 months, and liabilities of €16.1m due beyond 12 months. Offsetting this, it had €178.0k in cash and €2.27m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €22.4m.

Given this deficit is actually higher than the company's market capitalization of €20.2m, we think shareholders really should watch Eurasia Fonciere Investissements Société Anonyme's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.15 times and a disturbingly high net debt to EBITDA ratio of 85.6 hit our confidence in Eurasia Fonciere Investissements Société Anonyme like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Even worse, Eurasia Fonciere Investissements Société Anonyme saw its EBIT tank 89% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Eurasia Fonciere Investissements Société Anonyme will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Eurasia Fonciere Investissements Société Anonyme saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Eurasia Fonciere Investissements Société Anonyme's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its net debt to EBITDA also fails to instill confidence. Considering all the factors previously mentioned, we think that Eurasia Fonciere Investissements Société Anonyme really is carrying too much debt. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Eurasia Fonciere Investissements Société Anonyme has 5 warning signs (and 3 which are a bit concerning) we think you should know about.

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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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.