Is Estoril Sol SGPS (ELI:ESON) Using Debt Sensibly?

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. As with many other companies Estoril Sol, SGPS, S.A. (ELI:ESON) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Estoril Sol SGPS

How Much Debt Does Estoril Sol SGPS Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Estoril Sol SGPS had €6.57m of debt, an increase on none, over one year. However, its balance sheet shows it holds €58.7m in cash, so it actually has €52.1m net cash.

How Strong Is Estoril Sol SGPS' Balance Sheet?

The latest balance sheet data shows that Estoril Sol SGPS had liabilities of €34.7m due within a year, and liabilities of €8.40m falling due after that. On the other hand, it had cash of €58.7m and €1.21m worth of receivables due within a year. So it can boast €16.9m more liquid assets than total liabilities.

This excess liquidity suggests that Estoril Sol SGPS is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Estoril Sol SGPS boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Estoril Sol SGPS will need earnings to service that debt. 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.

Over 12 months, Estoril Sol SGPS made a loss at the EBIT level, and saw its revenue drop to €138m, which is a fall of 42%. To be frank that doesn't bode well.

So How Risky Is Estoril Sol SGPS?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Estoril Sol SGPS had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €24m and booked a €20m accounting loss. With only €52.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Estoril Sol SGPS (1 is a bit concerning) you should be aware of.

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. 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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