Eko Export (WSE:EEX) Is Carrying A Fair Bit Of Debt

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. Importantly, Eko Export S.A. (WSE:EEX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Eko Export

What Is Eko Export's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Eko Export had debt of zł25.7m, up from zł22.2m in one year. And it doesn't have much cash, so its net debt is about the same.

A Look At Eko Export's Liabilities

The latest balance sheet data shows that Eko Export had liabilities of zł26.5m due within a year, and liabilities of zł9.63m falling due after that. Offsetting these obligations, it had cash of zł42.0k as well as receivables valued at zł6.03m due within 12 months. So its liabilities total zł30.0m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of zł41.2m, so it does suggest shareholders should keep an eye on Eko Export's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Eko Export's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Eko Export had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to zł37m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Eko Export produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping zł5.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through zł2.9m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Eko Export is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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. 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.
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