These 4 Measures Indicate That Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme (ATH:MOTO) Is Using Debt Extensively

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.' 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, Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme (ATH:MOTO) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme had €17.4m of debt in June 2021, down from €27.6m, one year before. However, because it has a cash reserve of €8.59m, its net debt is less, at about €8.84m.

A Look At Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's Liabilities

We can see from the most recent balance sheet that Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme had liabilities of €32.9m falling due within a year, and liabilities of €21.5m due beyond that. Offsetting these obligations, it had cash of €8.59m as well as receivables valued at €8.04m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €37.8m.

This deficit is considerable relative to its market capitalization of €51.1m, so it does suggest shareholders should keep an eye on Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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).

Given net debt is only 1.4 times EBITDA, it is initially surprising to see that Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's EBIT has low interest coverage of 1.8 times. So one way or the other, it's clear the debt levels are not trivial. Shareholders should be aware that Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's EBIT was down 20% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme 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.

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 two years, 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

Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's EBIT growth rate and interest cover definitely weigh on it, in our esteem. But the good news is it seems to be able to convert EBIT to free cash flow with ease. Taking the abovementioned factors together we do think Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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 Emporiki Eisagogiki Aftokiniton Ditrohon kai Mihanon Thalassis Societe Anonyme you should be aware of, and 2 of them are concerning.

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.

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.

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