These 4 Measures Indicate That EL.En (BIT:ELN) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that EL.En. S.p.A. (BIT:ELN) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for EL.En

How Much Debt Does EL.En Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 EL.En had €45.5m of debt, an increase on €37.8m, over one year. But it also has €123.7m in cash to offset that, meaning it has €78.3m net cash.

How Strong Is EL.En's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EL.En had liabilities of €180.9m due within 12 months and liabilities of €48.8m due beyond that. Offsetting this, it had €123.7m in cash and €112.2m in receivables that were due within 12 months. So it can boast €6.28m more liquid assets than total liabilities.

This state of affairs indicates that EL.En's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €906.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that EL.En has more cash than debt is arguably a good indication that it can manage its debt safely.

While EL.En doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if EL.En can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. EL.En 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. In the last three years, EL.En's free cash flow amounted to 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that EL.En has net cash of €78.3m, as well as more liquid assets than liabilities. So we are not troubled with EL.En's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - EL.En has 1 warning sign we think 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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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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