Would Elastron - Steel Service Centers (ATH:ELSTR) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Elastron S.A. - Steel Service Centers (ATH:ELSTR) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Elastron - Steel Service Centers

How Much Debt Does Elastron - Steel Service Centers Carry?

As you can see below, at the end of June 2023, Elastron - Steel Service Centers had €58.7m of debt, up from €55.9m a year ago. Click the image for more detail. On the flip side, it has €29.0m in cash leading to net debt of about €29.7m.

How Healthy Is Elastron - Steel Service Centers' Balance Sheet?

The latest balance sheet data shows that Elastron - Steel Service Centers had liabilities of €34.3m due within a year, and liabilities of €58.4m falling due after that. Offsetting this, it had €29.0m in cash and €30.1m in receivables that were due within 12 months. So it has liabilities totalling €33.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €53.2m, so it does suggest shareholders should keep an eye on Elastron - Steel Service Centers' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Elastron - Steel Service Centers 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.

Over 12 months, Elastron - Steel Service Centers made a loss at the EBIT level, and saw its revenue drop to €170m, which is a fall of 7.7%. We would much prefer see growth.

Caveat Emptor

Importantly, Elastron - Steel Service Centers had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €1.6m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of €17m and the profit of €3.1m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for Elastron - Steel Service Centers that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.