ÉPDUFERR Nyilvánosan Muködo Részvénytársaság (BUSE:EPDUFERR) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that ÉPDUFERR Nyilvánosan Muködo Részvénytársaság (BUSE:EPDUFERR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 ÉPDUFERR Nyilvánosan Muködo Részvénytársaság

What Is ÉPDUFERR Nyilvánosan Muködo Részvénytársaság's Debt?

As you can see below, at the end of December 2023, ÉPDUFERR Nyilvánosan Muködo Részvénytársaság had Ft953.5m of debt, up from Ft660.1m a year ago. Click the image for more detail. However, it also had Ft81.5m in cash, and so its net debt is Ft872.0m.

How Strong Is ÉPDUFERR Nyilvánosan Muködo Részvénytársaság's Balance Sheet?

According to the last reported balance sheet, ÉPDUFERR Nyilvánosan Muködo Részvénytársaság had liabilities of Ft1.75b due within 12 months, and liabilities of Ft769.9m due beyond 12 months. Offsetting this, it had Ft81.5m in cash and Ft1.47b in receivables that were due within 12 months. So it has liabilities totalling Ft969.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since ÉPDUFERR Nyilvánosan Muködo Részvénytársaság has a market capitalization of Ft2.72b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

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).

ÉPDUFERR Nyilvánosan Muködo Részvénytársaság's debt is 4.7 times its EBITDA, and its EBIT cover its interest expense 5.2 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Notably, ÉPDUFERR Nyilvánosan Muködo Részvénytársaság made a loss at the EBIT level, last year, but improved that to positive EBIT of Ft92m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is ÉPDUFERR Nyilvánosan Muködo Részvénytársaság'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. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, ÉPDUFERR Nyilvánosan Muködo Részvénytársaság burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Mulling over ÉPDUFERR Nyilvánosan Muködo Részvénytársaság's attempt at converting EBIT to free cash flow, we're certainly not enthusiastic. But at least its interest cover is not so bad. Once we consider all the factors above, together, it seems to us that ÉPDUFERR Nyilvánosan Muködo Részvénytársaság's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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. To that end, you should be aware of the 5 warning signs we've spotted with ÉPDUFERR Nyilvánosan Muködo Részvénytársaság .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com