Is Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme (ATH:MOTO) Using Too Much 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. Importantly, Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme (ATH:MOTO) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme

What Is Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's Debt?

The image below, which you can click on for greater detail, shows that Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme had debt of €27.6m at the end of June 2020, a reduction from €32.2m over a year. However, it does have €2.97m in cash offsetting this, leading to net debt of about €24.6m.

How Strong Is Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's Balance Sheet?

The latest balance sheet data shows that Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme had liabilities of €30.4m due within a year, and liabilities of €29.1m falling due after that. Offsetting these obligations, it had cash of €2.97m as well as receivables valued at €9.45m due within 12 months. So it has liabilities totalling €47.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €28.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme 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).

While we wouldn't worry about Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's net debt to EBITDA ratio of 2.6, we think its super-low interest cover of 1.6 times is a sign of high leverage. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. One redeeming factor for Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme is that it turned last year's EBIT loss into a gain of €2.3m, over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Looking at the bigger picture, it seems clear to us that Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's use of debt is creating risks for the company. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme (of which 2 are a bit concerning!) you should know about.

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. 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.
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