Is Eko Export (WSE:EEX) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

Check out our latest analysis for Eko Export

What Is Eko Export's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Eko Export had zł22.5m of debt, an increase on zł14.8m, over one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Eko Export's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eko Export had liabilities of zł32.1m due within 12 months and liabilities of zł5.31m due beyond that. Offsetting these obligations, it had cash of zł98.0k as well as receivables valued at zł4.61m due within 12 months. So it has liabilities totalling zł32.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of zł50.0m, so it does suggest shareholders should keep an eye on Eko Export's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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 13%, to zł35m. We would much prefer see growth.

Caveat Emptor

Not only did Eko Export's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable zł5.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through zł8.7m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Eko Export you should be aware of, and 1 of them makes us a bit uncomfortable.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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