EL. D. Mouzakis (ATH:MOYZK) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, EL. D. Mouzakis S.A. (ATH:MOYZK) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for EL. D. Mouzakis

What Is EL. D. Mouzakis's Debt?

You can click the graphic below for the historical numbers, but it shows that EL. D. Mouzakis had €19.4m of debt in December 2021, down from €20.5m, one year before. However, it also had €1.05m in cash, and so its net debt is €18.3m.

A Look At EL. D. Mouzakis' Liabilities

According to the last reported balance sheet, EL. D. Mouzakis had liabilities of €1.51m due within 12 months, and liabilities of €21.1m due beyond 12 months. On the other hand, it had cash of €1.05m and €2.28m worth of receivables due within a year. So it has liabilities totalling €19.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €22.5m, so it does suggest shareholders should keep an eye on EL. D. Mouzakis' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely EL. D. Mouzakis has a sky high EBITDA ratio of 16.5, implying high debt, but a strong interest coverage of 51.5. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. Pleasingly, EL. D. Mouzakis is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 131% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is EL. D. Mouzakis'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, EL. D. Mouzakis generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

EL. D. Mouzakis's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But the stark truth is that we are concerned by its net debt to EBITDA. All these things considered, it appears that EL. D. Mouzakis can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. We've identified 3 warning signs with EL. D. Mouzakis (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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. 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.