Is Elvalhalcor Hellenic Copper and Aluminium Industry (ATH:ELHA) Using Too Much Debt?

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.' 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, Elvalhalcor Hellenic Copper and Aluminium Industry S.A. (ATH:ELHA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its 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?

The image below, which you can click on for greater detail, shows that Elvalhalcor Hellenic Copper and Aluminium Industry had debt of €921.6m at the end of June 2023, a reduction from €1.06b over a year. However, it also had €42.5m in cash, and so its net debt is €879.1m.

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 €685.4m due within 12 months, and liabilities of €852.5m due beyond 12 months. Offsetting this, it had €42.5m in cash and €341.2m in receivables that were due within 12 months. So it has liabilities totalling €1.15b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €614.6m 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 definitely think shareholders need to watch this one closely. At the end of the day, Elvalhalcor Hellenic Copper and Aluminium Industry would probably need a major re-capitalization if its creditors were to demand repayment.

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). 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 4.0 and its EBIT covered its interest expense 3.4 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Worse, Elvalhalcor Hellenic Copper and Aluminium Industry's EBIT was down 35% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Elvalhalcor Hellenic Copper and Aluminium Industry will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Elvalhalcor Hellenic Copper and Aluminium Industry's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And even its net debt to EBITDA fails to inspire much confidence. Considering all the factors previously mentioned, we think that Elvalhalcor Hellenic Copper and Aluminium Industry really is carrying too much debt. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. 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 3 warning signs we've spotted with Elvalhalcor Hellenic Copper and Aluminium Industry .

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.