Warren Buffett famously said, '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, ESI Group SA (EPA:ESI) does carry debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
Check out our latest analysis for ESI Group
What Is ESI Group's Debt?
The image below, which you can click on for greater detail, shows that ESI Group had debt of €45.1m at the end of January 2019, a reduction from €47.6m over a year. However, it also had €18.1m in cash, and so its net debt is €27.0m.
A Look At ESI Group's Liabilities
We can see from the most recent balance sheet that ESI Group had liabilities of €73.6m falling due within a year, and liabilities of €51.4m due beyond that. On the other hand, it had cash of €18.1m and €80.5m worth of receivables due within a year. So it has liabilities totalling €26.4m more than its cash and near-term receivables, combined.
Given ESI Group has a market capitalization of €180.0m, 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.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
ESI Group has a debt to EBITDA ratio of 2.6 and its EBIT covered its interest expense 5.9 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Unfortunately, ESI Group's EBIT flopped 16% over the last four quarters. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ESI Group'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.