Does Europcar Mobility Group (EPA:EUCAR) Have A Healthy Balance Sheet?

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 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. As with many other companies Europcar Mobility Group S.A. (EPA:EUCAR) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Europcar Mobility Group

What Is Europcar Mobility Group's Net Debt?

The image below, which you can click on for greater detail, shows that Europcar Mobility Group had debt of €4.18b at the end of September 2020, a reduction from €4.77b over a year. However, it does have €432.6m in cash offsetting this, leading to net debt of about €3.75b.

How Strong Is Europcar Mobility Group's Balance Sheet?

We can see from the most recent balance sheet that Europcar Mobility Group had liabilities of €3.80b falling due within a year, and liabilities of €2.63b due beyond that. Offsetting these obligations, it had cash of €432.6m as well as receivables valued at €1.30b due within 12 months. So it has liabilities totalling €4.69b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €100.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Europcar Mobility Group would probably need a major re-capitalization if its creditors were to demand repayment. 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 Europcar Mobility Group'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.

Over 12 months, Europcar Mobility Group made a loss at the EBIT level, and saw its revenue drop to €2.1b, which is a fall of 30%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Europcar Mobility Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €179m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost €326m in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Europcar Mobility Group .

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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