Is Eurotech (BIT:ETH) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Eurotech S.p.A. (BIT:ETH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Eurotech

What Is Eurotech's Debt?

As you can see below, Eurotech had €23.4m of debt at March 2022, down from €27.9m a year prior. But it also has €24.3m in cash to offset that, meaning it has €902.0k net cash.

A Look At Eurotech's Liabilities

Zooming in on the latest balance sheet data, we can see that Eurotech had liabilities of €30.4m due within 12 months and liabilities of €22.7m due beyond that. Offsetting these obligations, it had cash of €24.3m as well as receivables valued at €13.0m due within 12 months. So its liabilities total €15.7m more than the combination of its cash and short-term receivables.

Given Eurotech has a market capitalization of €118.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Eurotech boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Eurotech'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, Eurotech reported revenue of €68m, which is a gain of 8.6%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Eurotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Eurotech lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €8.7m of cash and made a loss of €9.9m. Given it only has net cash of €902.0k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 1 warning sign for Eurotech you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.