Here's Why EKINOPS (EPA:EKI) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that EKINOPS S.A. (EPA:EKI) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for EKINOPS

How Much Debt Does EKINOPS Carry?

As you can see below, at the end of December 2023, EKINOPS had €26.6m of debt, up from €21.4m a year ago. Click the image for more detail. But it also has €47.2m in cash to offset that, meaning it has €20.6m net cash.

How Strong Is EKINOPS' Balance Sheet?

According to the last reported balance sheet, EKINOPS had liabilities of €45.3m due within 12 months, and liabilities of €27.9m due beyond 12 months. Offsetting this, it had €47.2m in cash and €30.0m in receivables that were due within 12 months. So it actually has €3.94m more liquid assets than total liabilities.

This surplus suggests that EKINOPS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, EKINOPS boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that EKINOPS's EBIT was down 59% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 EKINOPS'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. EKINOPS may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, EKINOPS recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case EKINOPS has €20.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €5.5m, being 98% of its EBIT. So we don't have any problem with EKINOPS's use of debt. 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 - EKINOPS has 2 warning signs we think 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.

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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.