Is Askoll Eva (BIT:EVA) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Askoll Eva SpA (BIT:EVA) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Askoll Eva

What Is Askoll Eva's Net Debt?

As you can see below, at the end of June 2021, Askoll Eva had €15.4m of debt, up from €14.7m a year ago. Click the image for more detail. On the flip side, it has €3.81m in cash leading to net debt of about €11.6m.

A Look At Askoll Eva's Liabilities

We can see from the most recent balance sheet that Askoll Eva had liabilities of €7.79m falling due within a year, and liabilities of €19.5m due beyond that. Offsetting this, it had €3.81m in cash and €5.41m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €18.1m.

This deficit is considerable relative to its market capitalization of €21.1m, so it does suggest shareholders should keep an eye on Askoll Eva's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Askoll Eva can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Askoll Eva made a loss at the EBIT level, and saw its revenue drop to €15m, which is a fall of 4.9%. We would much prefer see growth.

Caveat Emptor

Importantly, Askoll Eva had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €880k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €700k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Askoll Eva is showing 2 warning signs in our investment analysis , you should know about...

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.