Entersoft (ATH:ENTER) Seems To Use Debt Rather Sparingly
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Entersoft S.A. (ATH:ENTER) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Entersoft
What Is Entersoft's Net Debt?
As you can see below, Entersoft had €1.12m of debt at June 2019, down from €1.68m a year prior. However, its balance sheet shows it holds €3.90m in cash, so it actually has €2.78m net cash.
How Strong Is Entersoft's Balance Sheet?
The latest balance sheet data shows that Entersoft had liabilities of €4.10m due within a year, and liabilities of €2.39m falling due after that. On the other hand, it had cash of €3.90m and €7.36m worth of receivables due within a year. So it actually has €4.78m more liquid assets than total liabilities.
This surplus suggests that Entersoft is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Entersoft has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Entersoft has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Entersoft will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Entersoft has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Entersoft recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Entersoft has net cash of €2.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 51% over the last year. So we don't think Entersoft's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Entersoft's earnings per share history for free.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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