Is Askoll Eva (BIT:EVA) Using Debt In A Risky Way?

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.' 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 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?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Askoll Eva

What Is Askoll Eva's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Askoll Eva had €15.5m of debt, an increase on €14.4m, over one year. However, it also had €2.35m in cash, and so its net debt is €13.2m.

A Look At Askoll Eva's Liabilities

Zooming in on the latest balance sheet data, we can see that Askoll Eva had liabilities of €6.91m due within 12 months and liabilities of €16.0m due beyond that. On the other hand, it had cash of €2.35m and €3.75m worth of receivables due within a year. So its liabilities total €16.9m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €15.0m, we think shareholders really should watch Askoll Eva's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Askoll Eva made a loss at the EBIT level, and saw its revenue drop to €11m, which is a fall of 45%. To be frank that doesn't bode well.

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. Its EBIT loss was a whopping €3.2m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €5.0m over the last twelve months. That means it's on the risky side of things. 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 example, we've discovered 3 warning signs for Askoll Eva (1 is concerning!) that you should be aware of before investing here.

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. 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.
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