Is EFORT Intelligent Equipment (SHSE:688165) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 EFORT Intelligent Equipment Co., Ltd. (SHSE:688165) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for EFORT Intelligent Equipment

What Is EFORT Intelligent Equipment's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 EFORT Intelligent Equipment had CN¥720.4m of debt, an increase on CN¥647.8m, over one year. On the flip side, it has CN¥698.8m in cash leading to net debt of about CN¥21.7m.

How Healthy Is EFORT Intelligent Equipment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EFORT Intelligent Equipment had liabilities of CN¥1.03b due within 12 months and liabilities of CN¥536.5m due beyond that. Offsetting this, it had CN¥698.8m in cash and CN¥1.22b in receivables that were due within 12 months. So it can boast CN¥349.5m more liquid assets than total liabilities.

This short term liquidity is a sign that EFORT Intelligent Equipment could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, EFORT Intelligent Equipment has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since EFORT Intelligent Equipment will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, EFORT Intelligent Equipment reported revenue of CN¥1.8b, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate EFORT Intelligent Equipment's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥108m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. For instance, we've identified 1 warning sign for EFORT Intelligent Equipment that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.