Epsilon Net (ATH:EPSIL) Seems To Use Debt Rather Sparingly

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. We note that Epsilon Net S.A. (ATH:EPSIL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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.

See our latest analysis for Epsilon Net

How Much Debt Does Epsilon Net Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Epsilon Net had €15.7m of debt, an increase on €15.1m, over one year. However, it does have €23.7m in cash offsetting this, leading to net cash of €7.94m.

How Strong Is Epsilon Net's Balance Sheet?

According to the last reported balance sheet, Epsilon Net had liabilities of €27.6m due within 12 months, and liabilities of €11.8m due beyond 12 months. Offsetting this, it had €23.7m in cash and €19.6m in receivables that were due within 12 months. So it can boast €3.92m 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 €322.7m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Epsilon Net has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Epsilon Net grew its EBIT by 236% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Epsilon Net can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the last three years, Epsilon Net recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Epsilon Net has net cash of €7.94m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €9.8m, being 95% of its EBIT. So we don't think Epsilon Net's use of debt is risky. We'd be very excited to see if Epsilon Net insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.