These 4 Measures Indicate That Esker (EPA:ALESK) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Esker SA (EPA:ALESK) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 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 Esker

What Is Esker's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Esker had debt of €14.2m, up from €5.13m in one year. But it also has €40.4m in cash to offset that, meaning it has €26.2m net cash.

A Look At Esker's Liabilities

According to the last reported balance sheet, Esker had liabilities of €27.2m due within 12 months, and liabilities of €29.3m due beyond 12 months. Offsetting this, it had €40.4m in cash and €28.6m in receivables that were due within 12 months. So it can boast €12.5m more liquid assets than total liabilities.

This state of affairs indicates that Esker's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €1.31b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Esker boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Esker grew its EBIT by 9.7% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Esker's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Esker 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. Over the most recent three years, Esker recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Esker has €26.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in €13m. So we don't think Esker's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Esker, you may well want to click here to check an interactive graph of its earnings per share history.

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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