Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that EQTEC plc (LON:EQT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is EQTEC's Net Debt?
As you can see below, EQTEC had €2.58m of debt at June 2019, down from €5.29m a year prior. However, it does have €240.3k in cash offsetting this, leading to net debt of about €2.34m.
A Look At EQTEC's Liabilities
The latest balance sheet data shows that EQTEC had liabilities of €2.23m due within a year, and liabilities of €2.36m falling due after that. Offsetting this, it had €240.3k in cash and €382.9k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.97m.
This deficit is considerable relative to its market capitalization of €5.48m, so it does suggest shareholders should keep an eye on EQTEC's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is EQTEC'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.
Over 12 months, EQTEC reported revenue of €3.2m, which is a gain of 463%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
Even though EQTEC managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping €2.6m. 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. Another cause for caution is that is bled €2.5m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like EQTEC I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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