These 4 metrics show that Eurocash (WSE: EUR) uses debt to a large extent


David Iben put it well when he said, “Volatility is not a risk that interests us. Our aim is to avoid the permanent loss of capital. ‘ Whenever we think about how risky a business is, we always like to look at the use of debt as over-indebtedness can lead to ruin. We can see that Eurocash SA (WSE: EUR) uses debt in his business. But does this debt worry shareholders?

When is debt a problem?

Debt and other liabilities become risky for a company when it cannot meet those obligations easily, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company fails to meet its legal debt settlement obligations, shareholders could get away with nothing. While this isn’t too common, we often see indebted companies permanently diluting their shareholders by forcing lenders to raise capital at a distressed price. Of course, debt can be an important tool in any business, especially in capital-intensive companies. The first step in looking at a company’s debt level is to look at its cash and debt together.

Check out our latest analysis for Eurocash

What is Eurocash’s debt?

As you can see below, at the end of December 2020, Eurocash had a debt of 853.5 million zlotys compared to 670.0 million zlotys a year ago. Click on the picture for more details. On the other hand, it has PLN 117.8 million in cash, resulting in a net debt of around PLN 735.6 million.

WSE: EUR Debt-to-Equity History March 22, 2021

How strong is Eurocash’s balance sheet?

The latest balance sheet data show that Eurocash had liabilities of PLN 4.93 billion within one year and liabilities of PLN 2.14 billion thereafter. On the other hand, there were cash and cash equivalents of PLN 117.8 million and receivables of PLN 1.37 billion, which were due within 12 months. Its liabilities are thus PLN 5.57 billion more than the combination of cash and short-term receivables.

This deficit casts a shadow over the company of 1.89 billion zł, like a colossus that towers over mere mortals. So there is no doubt that we would be closely monitoring his record. After all, Eurocash would likely need a bigger recapitalization if it had to pay its creditors today.

We measure a company’s debt burden in relation to its profitability by looking at net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily earnings before interest and taxes (EBIT) cover its interest costs (Interest coverage). The advantage of this approach is that we take into account both the absolute level of debt (with net debt to EBITDA) and the actual interest expenses associated with this debt (with its interest coverage ratio).

While Eurocash has a reasonably reasonable net debt-to-EBITDA multiple of 1.6, its interest coverage appears to be weak at 2.1. This makes us wonder if the company is paying high interest because it is considered risky. In any case, it is safe to say that the company has significant debt. We saw Eurocash increase its EBIT by 8.7% over the past twelve months. This is far from incredible, but good when it comes to paying off debt. Undoubtedly, we learn most about balance sheet debt. But more than anything, it is future profits that will determine Eurocash’s ability to maintain a healthy balance sheet in the future. So if you want to see what the pros think, you might find this free analyst earnings forecast report to be interesting.

After all, while tax officials may worship book profits while lenders only accept cold cash. So the logical step is to look at the proportion of EBIT that corresponds to the actual free cash flow. Fortunately for all shareholders, Eurocash has actually generated more free cash flow than EBIT over the past three years. This kind of heavy cash conversion makes us as excited as the crowd when the beat drops at a daft punk concert.

Our view

To be honest, both Eurocash’s interest coverage and track record of keeping total debt under control make us pretty uncomfortable with his debt level. But at least it’s pretty decent to convert EBIT to free cash flow; that is encouraging. Looking at the balance sheet, and taking all of these factors into account, we believe debt makes Eurocash stock a bit risky. That’s not necessarily bad, but we’d generally be more comfortable with less leverage. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, any business can involve off-balance sheet risks. Note that Eurocash is displayed 1 warning sign in our investment analysis , you should know that…

After all that, if you’re more interested in a fast-growing company with a rock-solid balance sheet, then drop by our list of net cash growth stocks without delay.

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