These 4 Measures Indicate That Epsilon Net (ATH:EPSIL) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Epsilon Net S.A. (ATH:EPSIL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Epsilon Net

How Much Debt Does Epsilon Net Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Epsilon Net had debt of €15.1m, up from €6.80m in one year. However, its balance sheet shows it holds €21.1m in cash, so it actually has €6.05m net cash.

How Strong Is Epsilon Net's Balance Sheet?

According to the last reported balance sheet, Epsilon Net had liabilities of €12.6m due within 12 months, and liabilities of €15.0m due beyond 12 months. On the other hand, it had cash of €21.1m and €12.1m worth of receivables due within a year. So it actually has €5.50m more liquid assets than total liabilities.

This short term liquidity is a sign that Epsilon Net could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 106% over twelve months. 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 you can't view debt in total isolation; since Epsilon Net 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Epsilon Net may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Epsilon Net actually produced more free cash flow than EBIT. 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 €6.05m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €5.3m, being 113% of its EBIT. So we don't think Epsilon Net's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Epsilon Net that 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.

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