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

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.' 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 Askoll EVA SpA (BIT:EVA) 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Askoll EVA

How Much Debt Does Askoll EVA Carry?

As you can see below, at the end of June 2024, Askoll EVA had €13.5m of debt, up from €11.7m a year ago. Click the image for more detail. However, it also had €2.70m in cash, and so its net debt is €10.8m.

How Healthy Is Askoll EVA's Balance Sheet?

The latest balance sheet data shows that Askoll EVA had liabilities of €11.6m due within a year, and liabilities of €17.0m falling due after that. Offsetting these obligations, it had cash of €2.70m as well as receivables valued at €4.91m due within 12 months. So its liabilities total €20.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €4.77m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Askoll EVA would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Askoll EVA's ability to maintain a healthy balance sheet going forward. 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 €8.3m, which is a fall of 31%. That makes us nervous, to say the least.

Caveat Emptor

While Askoll EVA's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €4.3m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost €6.4m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Askoll EVA is showing 3 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

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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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.