ESOTIQ & Henderson (WSE:EAH) has a fairly healthy track record
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that ESOTIQ & Henderson SA (WSE:EAH) uses debt in its business. But does this debt worry shareholders?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for ESOTIQ & Henderson
What is ESOTIQ & Henderson debt?
As you can see below, at the end of March 2022, ESOTIQ & Henderson had a debt of 14.4 million zł, compared to 5.72 million zł a year ago. Click on the image for more details. On the other hand, it has 4.98 million zł of liquid assets, which results in a net debt of approximately 9.42 million zł.
How strong is ESOTIQ & Henderson’s balance sheet?
According to the last published balance sheet, ESOTIQ & Henderson had liabilities of 69.1 million zł due within 12 months and liabilities of 30.6 million zł due beyond 12 months. On the other hand, he had cash of 4.98 million zł and 14.2 million zł of receivables due within the year. Thus, its liabilities total 80.5 million zł more than the combination of its cash and short-term receivables.
Since this deficit is actually greater than the company’s market capitalization of zł59.1 million, we think shareholders should really be watching ESOTIQ & Henderson’s debt levels, like a parent watching their child. riding a bike for the first time. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
ESOTIQ & Henderson has a low debt to EBITDA ratio of just 0.27. But what’s really cool is that he actually managed to receive more interest than he paid in the last year. So it’s fair to say he can handle debt like a hotshot teppanyaki chef handles the kitchen. In addition, ESOTIQ & Henderson has increased its EBIT by 61% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is ESOTIQ & Henderson’s earnings that will influence the balance sheet going forward. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, ESOTIQ & Henderson has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
The good news is that ESOTIQ & Henderson’s demonstrated ability to cover its interest charges with its EBIT delights us like a fluffy puppy does a toddler. But the hard truth is that we are concerned about his total passive level. All told, it looks like ESOTIQ & Henderson can comfortably manage its current level of debt. Of course, while this leverage can improve return on equity, it comes with more risk, so it’s worth keeping an eye out for. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for ESOTIQ & Henderson you should know.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.