Here's Why Eurasia Fonciere Investissements Société Anonyme (EPA:EFI) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Eurasia Fonciere Investissements Société Anonyme (EPA:EFI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Eurasia Fonciere Investissements Société Anonyme

How Much Debt Does Eurasia Fonciere Investissements Société Anonyme Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Eurasia Fonciere Investissements Société Anonyme had €10.4m of debt, an increase on none, over one year. On the flip side, it has €250.0k in cash leading to net debt of about €10.2m.

A Look At Eurasia Fonciere Investissements Société Anonyme's Liabilities

We can see from the most recent balance sheet that Eurasia Fonciere Investissements Société Anonyme had liabilities of €8.74m falling due within a year, and liabilities of €17.0m due beyond that. On the other hand, it had cash of €250.0k and €17.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €8.49m.

While this might seem like a lot, it is not so bad since Eurasia Fonciere Investissements Société Anonyme has a market capitalization of €17.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Eurasia Fonciere Investissements Société Anonyme's net debt to EBITDA ratio of about 2.4 suggests only moderate use of debt. And its strong interest cover of 70.7 times, makes us even more comfortable. Notably, Eurasia Fonciere Investissements Société Anonyme's EBIT launched higher than Elon Musk, gaining a whopping 153% on last year. There's no doubt that we learn most about debt from the balance sheet. But it is Eurasia Fonciere Investissements 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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Eurasia Fonciere Investissements Société Anonyme burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Eurasia Fonciere Investissements Société Anonyme's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. Looking at all this data makes us feel a little cautious about Eurasia Fonciere Investissements Société Anonyme's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Eurasia Fonciere Investissements Société Anonyme (of which 2 shouldn't be ignored!) 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. 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.
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