Elvalhalcor Hellenic Copper and Aluminium Industry (ATH:ELHA) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Elvalhalcor Hellenic Copper and Aluminium Industry S.A. (ATH:ELHA) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Elvalhalcor Hellenic Copper and Aluminium Industry

What Is Elvalhalcor Hellenic Copper and Aluminium Industry's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Elvalhalcor Hellenic Copper and Aluminium Industry had €990.8m of debt, an increase on €863.0m, over one year. However, because it has a cash reserve of €35.2m, its net debt is less, at about €955.6m.

How Strong Is Elvalhalcor Hellenic Copper and Aluminium Industry's Balance Sheet?

According to the last reported balance sheet, Elvalhalcor Hellenic Copper and Aluminium Industry had liabilities of €666.9m due within 12 months, and liabilities of €888.6m due beyond 12 months. On the other hand, it had cash of €35.2m and €316.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.20b.

The deficiency here weighs heavily on the €598.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Elvalhalcor Hellenic Copper and Aluminium Industry would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Elvalhalcor Hellenic Copper and Aluminium Industry has a debt to EBITDA ratio of 2.9 and its EBIT covered its interest expense 6.2 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. It is well worth noting that Elvalhalcor Hellenic Copper and Aluminium Industry's EBIT shot up like bamboo after rain, gaining 70% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Elvalhalcor Hellenic Copper and Aluminium Industry will need earnings to service that debt. 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 it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Elvalhalcor Hellenic Copper and Aluminium Industry saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Elvalhalcor Hellenic Copper and Aluminium Industry's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Overall, it seems to us that Elvalhalcor Hellenic Copper and Aluminium Industry's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Elvalhalcor Hellenic Copper and Aluminium Industry that 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.