EL. D. Mouzakis (ATH:MOYZK) seems to be using debt quite wisely

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, EL. D. Mouzakis SA (ATH:MOYZK) is in debt. But the more important question is: what risk does this debt create?

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. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for EL. D. Mouzakis

What is EL. The debt of D. Mouzakis?

You can click on the chart below for historical numbers, but it shows EL. D. Mouzakis had 19.4 million euros in debt in December 2021, compared to 20.5 million euros a year earlier. However, he also had €1.05 million in cash, so his net debt is €18.3 million.

ATSE: History of Debt to Equity of MOYZK June 17, 2022

A look at EL. Responsibilities of D. Mouzakis

According to the latest published report, EL. D. Mouzakis had liabilities of €1.51 million within 12 months and liabilities of €21.1 million beyond 12 months. On the other hand, it has cash of €1.05 million and €2.28 million in receivables at less than one year. It therefore has liabilities totaling €19.2 million more than its cash and short-term receivables, combined.

This deficit is considerable compared to its market capitalization of 22.5 million euros, so it suggests that shareholders keep an eye on EL. Use of debt by D. Mouzakis. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.

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). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Oddly EL. D. Mouzakis has a sky-high EBITDA ratio of 16.5, implying high debt, but high interest coverage of 51.5. This means that unless the company has access to very cheap debt, these interest charges will likely increase in the future. With pleasure, EL. D. Mouzakis is growing its EBIT faster than former Australian Prime Minister Bob Hawke downed a drink, posting a 131% gain over the last twelve months. The balance sheet is clearly the area to focus on when analyzing debt. But it’s EL. The profits of D. Mouzakis which will influence the holding of the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, EL. D. Mouzakis generated free cash flow of a very strong 82% of EBIT, more than expected. This positions him well to pay off debt if desired.

Our point of view

EL. D. Mouzakis’ interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But the harsh truth is that we are concerned about its net debt to EBITDA. All these things considered, it appears that EL. D. Mouzakis can comfortably manage his current level of debt. On the plus side, this leverage can increase shareholder returns, but the potential downside is greater risk of loss, so it’s worth keeping an eye on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. We have identified 3 warning signs with EL. D. Mouzakis (at least 1 which is a little unpleasant), and understanding them should be part of your investment process.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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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