We Think ELES Semiconductor Equipment (BIT:ELES) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 ELES Semiconductor Equipment S.p.A. (BIT:ELES) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ELES Semiconductor Equipment

How Much Debt Does ELES Semiconductor Equipment Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 ELES Semiconductor Equipment had €10.9m of debt, an increase on €8.28m, over one year. However, it does have €11.4m in cash offsetting this, leading to net cash of €564.0k.

How Strong Is ELES Semiconductor Equipment's Balance Sheet?

The latest balance sheet data shows that ELES Semiconductor Equipment had liabilities of €7.40m due within a year, and liabilities of €9.22m falling due after that. On the other hand, it had cash of €11.4m and €6.23m worth of receivables due within a year. So it can boast €1.04m more liquid assets than total liabilities.

Having regard to ELES Semiconductor Equipment's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €93.8m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, ELES Semiconductor Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that ELES Semiconductor Equipment grew its EBIT by 12% last year, making its debt load easier to handle. 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 ELES Semiconductor Equipment 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. While ELES Semiconductor Equipment has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, ELES Semiconductor Equipment reported free cash flow worth 12% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ELES Semiconductor Equipment has net cash of €564.0k, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with ELES Semiconductor Equipment's debt use. 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. For instance, we've identified 1 warning sign for ELES Semiconductor Equipment that you should be aware of.

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. 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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