These 4 measures indicate that Eurasia Fonciere Investissements Société Anonyme (EPA: EFI) uses debt intensively.


Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Eurasia Foncière Investissements Public Limited Company (EPA: EFI) uses debt. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest analysis for Eurasia Fonciere Investissements Société Anonyme

What is the debt of Eurasia Fonciere Investissements Société Anonyme?

The image below, which you can click for more details, shows that Eurasia Fonciere Investissements Société Anonyme had a debt of € 9.91 million at the end of June 2021, compared to € 10.9 million over one year. However, he also had € 917.0K in cash, and therefore his net debt is € 8.99M.

ENXTPA: History of debt to EFI’s equity December 7, 2021

A look at the liabilities of Eurasia Fonciere Investissements Société Anonyme

According to the last published balance sheet, Eurasia Fonciere Investissements Société Anonyme had liabilities of € 8.91 million at 12 months and liabilities of € 16.7 million over 12 months. In compensation for these obligations, he had cash of € 917.0 K as well as receivables valued at € 17.1 M within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 7.56 million.

If this may sound like a lot, it is not so bad since Eurasia Fonciere Investissements Société Anonyme has a market capitalization of 29.8 M €, and could therefore probably strengthen its balance sheet by raising capital if necessary. But we absolutely want to keep our eyes open for indications that its debt is too risky.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

We can say that the moderate net debt to EBITDA ratio of Eurasia Fonciere Investissements Société Anonyme (being 2.5), encourages prudence in terms of debt. And its impressive EBIT of 315 times its interest costs, means the debt burden is as light as a peacock feather. It is important to note that the EBIT of Eurasia Fonciere Investissements Société Anonyme has fallen by 38% over the past twelve months. If this decline continues, it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; because Eurasia Fonciere Investissements Société Anonyme will need profits to service this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, a business can only repay its debts with hard cash, not with accounting profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. During the last two years, the free cash flow of Eurasia Fonciere Investissements Société Anonyme amounted to 27% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.

Our point of view

Neither the ability of Eurasia Fonciere Investissements Société Anonyme to grow its EBIT nor its conversion of EBIT into free cash flow gave us confidence in its ability to take on more debt. But her coverage of interest tells a very different story and suggests some resilience. When we consider all the factors mentioned, it seems to us that Eurasia Fonciere Investissements Société Anonyme takes risks with its recourse to debt. While this debt may increase returns, we believe the company now has sufficient leverage. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Please note that Eurasia Fonciere Investissements Société Anonyme displays 4 warning signs in our investment analysis , and 2 of them are a bit disturbing …

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.


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