Health Check: How Prudently Does Eko Export (WSE:EEX) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Eko Export S.A. (WSE:EEX) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Eko Export

How Much Debt Does Eko Export Carry?

The image below, which you can click on for greater detail, shows that Eko Export had debt of zł22.4m at the end of September 2021, a reduction from zł24.6m over a year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Eko Export's Balance Sheet?

According to the last reported balance sheet, Eko Export had liabilities of zł30.2m due within 12 months, and liabilities of zł6.26m due beyond 12 months. Offsetting this, it had zł226.0k in cash and zł4.98m in receivables that were due within 12 months. So it has liabilities totalling zł31.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of zł34.2m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Eko Export's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Eko Export wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to zł41m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Eko Export had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost zł1.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of zł8.7m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. 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 are potentially serious...

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. 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.