Is Electro Optic Systems Holdings (ASX:EOS) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Electro Optic Systems Holdings Limited (ASX:EOS) does use debt in its business. But is this debt a concern to shareholders?

We've discovered 1 warning sign about Electro Optic Systems Holdings. View them for free.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Electro Optic Systems Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Electro Optic Systems Holdings had AU$47.9m of debt in December 2024, down from AU$64.8m, one year before. However, because it has a cash reserve of AU$41.1m, its net debt is less, at about AU$6.86m.

A Look At Electro Optic Systems Holdings' Liabilities

According to the last reported balance sheet, Electro Optic Systems Holdings had liabilities of AU$154.7m due within 12 months, and liabilities of AU$26.8m due beyond 12 months. Offsetting this, it had AU$41.1m in cash and AU$75.1m in receivables that were due within 12 months. So its liabilities total AU$65.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Electro Optic Systems Holdings has a market capitalization of AU$243.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Electro Optic Systems Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Check out our latest analysis for Electro Optic Systems Holdings

In the last year Electro Optic Systems Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 9.0%, to AU$177m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Electro Optic Systems Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$27m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$42m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Electro Optic Systems Holdings , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.