Epsilon Net (ATH:EPSIL) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Epsilon Net S.A. (ATH:EPSIL) does carry debt. But should shareholders be worried about its use of debt?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Epsilon Net

What Is Epsilon Net's Net Debt?

As you can see below, at the end of June 2021, Epsilon Net had €15.6m of debt, up from €6.63m a year ago. Click the image for more detail. However, it does have €19.3m in cash offsetting this, leading to net cash of €3.69m.

How Strong Is Epsilon Net's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Epsilon Net had liabilities of €15.7m due within 12 months and liabilities of €14.1m due beyond that. Offsetting these obligations, it had cash of €19.3m as well as receivables valued at €13.9m due within 12 months. So it can boast €3.33m more liquid assets than total liabilities.

This state of affairs indicates that Epsilon Net's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €273.4m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Epsilon Net boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Epsilon Net grew its EBIT by 270% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Epsilon Net's earnings that will influence how the balance sheet holds up in the future. 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. While Epsilon Net has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Epsilon Net actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Epsilon Net has net cash of €3.69m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €6.7m, being 105% of its EBIT. So is Epsilon Net's debt a risk? It doesn't seem so to us. 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 example - Epsilon Net has 3 warning signs we think you should be aware of.

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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