Health Check: How Cautiously Does eDreams ODIGEO (BME: EDR) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that eDreams ODIGEO SA (BME: EDR) uses debt in its business. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.

Discover our latest analysis for eDreams ODIGEO

What is the net debt of eDreams ODIGEO?

As you can see below, eDreams ODIGEO had 516.9 million euros in debt in June 2021, up from 539.6 million euros the previous year. However, he also had 45.2 million euros in cash, so his net debt is 471.7 million euros.

BME: EDR History of debt to equity September 29, 2021

How healthy is eDreams ODIGEO’s balance sheet?

Zooming in on the latest balance sheet data, we can see that eDreams ODIGEO had a liability of € 262.8 million due within 12 months and a liability of € 538.0 million due beyond. On the other hand, it had cash of € 45.2 million and € 47.1 million in receivables within one year. Its liabilities therefore amount to € 708.6 million more than the combination of its cash and short-term receivables.

This is a mountain of leverage compared to its market capitalization of € 835.7 million. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine eDreams ODIGEO’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Over 12 months, eDreams ODIGEO recorded a loss in terms of EBIT, and saw its turnover fall to 160 M €, a decrease of 63%. It makes us nervous, to say the least.

Emptor Warning

While ODIGEO’s drop in eDreams revenue is about as comforting as a wet hedge, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Indeed, it lost 67 M € at the EBIT level. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. Quite frankly, we believe the record is far from up to par, although it could improve over time. We would feel better if he turned his loss of 124 million euros over the last twelve months into a profit. So we think this title is quite risky. When we look at a riskier business, we like to see how its profits (or losses) have changed over time. Today we are providing readers with this interactive graph showing how eDreams ODIGEO’s earnings, revenue and operating cash flow have changed over the past few years.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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 shares 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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