David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Esker SA (EPA:ALESK) 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Esker's Debt?
As you can see below, Esker had €8.32m of debt at December 2018, down from €13.7m a year prior. However, it does have €22.8m in cash offsetting this, leading to net cash of €14.5m.
A Look At Esker's Liabilities
Zooming in on the latest balance sheet data, we can see that Esker had liabilities of €24.4m due within 12 months and liabilities of €16.5m due beyond that. Offsetting these obligations, it had cash of €22.8m as well as receivables valued at €23.0m due within 12 months. So it actually has €4.94m more liquid assets than total liabilities.
Having regard to Esker's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €459.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Esker has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that Esker grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Esker'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Esker may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Esker recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Esker has net cash of €14m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So is Esker's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Esker's earnings per share history for free.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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