Ellaktor (ATH:ELLAKTOR) takes some risk with its use of debt

Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Ellaktor SA (ATH:ELLAKTOR) uses debt in his business. But does this debt worry shareholders?

When is debt dangerous?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Ellaktor

What is Ellaktor’s debt?

You can click on the graph below for historical numbers, but it shows Ellaktor had €1.56 billion in debt in December 2021, up from €1.65 billion a year earlier. However, he also had €396.7 million in cash, so his net debt is €1.16 billion.

ATSE:ELLAKTOR Debt to Equity History April 19, 2022

How strong is Ellaktor’s balance sheet?

The latest balance sheet data shows that Ellaktor had liabilities of €656.4 million due within one year, and liabilities of €1.82 billion falling due thereafter. In return, it had 396.7 million euros in cash and 675.5 million euros in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €1.40 billion.

This deficit casts a shadow over the 515.3 million euro company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Ellaktor would likely need a major recapitalization if its creditors were to demand repayment.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Ellaktor shareholders face the double whammy of a high net debt to EBITDA ratio (7.8) and fairly low interest coverage, as EBIT is only 0.48 times expenses of interests. This means that we would consider him to be heavily indebted. However, the silver lining was that Ellaktor achieved a positive EBIT of €43 million in the last twelve months, an improvement on the loss of the previous year. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Ellaktor’s earnings that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Over the past year, Ellaktor has actually produced more free cash flow than EBIT. There’s nothing better than incoming money to stay in the good books of your lenders.

Our point of view

To be frank, Ellaktor’s interest coverage and track record of keeping its total liabilities under control makes us rather uncomfortable with its level of leverage. But on the bright side, its EBIT to free cash flow conversion is a good sign and makes us more optimistic. Overall, it seems to us that Ellaktor’s balance sheet is really a risk for the company. For this reason, we are quite cautious about the stock and believe shareholders should keep a close eye on its liquidity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 2 warning signs we spotted with Ellaktor.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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.

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