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 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 Elvalhalcor Hellenic Copper and Aluminium Industry S.A. (ATH:ELHA) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Elvalhalcor Hellenic Copper and Aluminium Industry

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

As you can see below, Elvalhalcor Hellenic Copper and Aluminium Industry had €788.8m of debt at September 2024, down from €919.5m a year prior. On the flip side, it has €97.3m in cash leading to net debt of about €691.5m.

A Look At Elvalhalcor Hellenic Copper and Aluminium Industry's Liabilities

According to the last reported balance sheet, Elvalhalcor Hellenic Copper and Aluminium Industry had liabilities of €732.3m due within 12 months, and liabilities of €726.5m due beyond 12 months. Offsetting this, it had €97.3m in cash and €342.5m in receivables that were due within 12 months. So it has liabilities totalling €1.02b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €742.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Elvalhalcor Hellenic Copper and Aluminium Industry has a debt to EBITDA ratio of 3.3 and its EBIT covered its interest expense 3.2 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Looking on the bright side, Elvalhalcor Hellenic Copper and Aluminium Industry boosted its EBIT by a silky 32% in the last year. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. 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 Elvalhalcor Hellenic Copper and Aluminium Industry'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Elvalhalcor Hellenic Copper and Aluminium Industry created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Mulling over Elvalhalcor Hellenic Copper and Aluminium Industry's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Elvalhalcor Hellenic Copper and Aluminium Industry stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. Case in point: We've spotted 3 warning signs for Elvalhalcor Hellenic Copper and Aluminium Industry you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.