Is ECSC Group (LON:ECSC) A Risky Investment?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ECSC Group plc (LON:ECSC) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ECSC Group

How Much Debt Does ECSC Group Carry?

The image below, which you can click on for greater detail, shows that ECSC Group had debt of UK£40.0k at the end of December 2018, a reduction from UK£61.0k over a year. However, it does have UK£646.0k in cash offsetting this, leading to net cash of UK£606.0k.

How Healthy Is ECSC Group's Balance Sheet?

According to the last reported balance sheet, ECSC Group had liabilities of UK£1.77m due within 12 months, and liabilities of UK£20.0k due beyond 12 months. On the other hand, it had cash of UK£646.0k and UK£1.17m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that ECSC Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£7.51m company is struggling for cash, we still think it's worth monitoring its balance sheet. ECSC Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ECSC 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.

In the last year ECSC Group managed to grow its revenue by 35%, to UK£5.4m. With any luck the company will be able to grow its way to profitability.

So How Risky Is ECSC Group?

Statistically speaking companies that lose money are riskier than those that make money. Anf the fact is that over the last twelve months ECSC Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through UK£947k of cash and made a loss of UK£1.2m. With only UK£646k on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, ECSC Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like ECSC Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.