Is EFORT Intelligent Equipment (SHSE:688165) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, EFORT Intelligent Equipment Co., Ltd. (SHSE:688165) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See our latest analysis for EFORT Intelligent Equipment

What Is EFORT Intelligent Equipment's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 EFORT Intelligent Equipment had debt of CN¥731.6m, up from CN¥634.5m in one year. However, it also had CN¥696.4m in cash, and so its net debt is CN¥35.2m.

How Strong Is EFORT Intelligent Equipment's Balance Sheet?

We can see from the most recent balance sheet that EFORT Intelligent Equipment had liabilities of CN¥1.05b falling due within a year, and liabilities of CN¥600.6m due beyond that. Offsetting this, it had CN¥696.4m in cash and CN¥1.27b in receivables that were due within 12 months. So it actually has CN¥310.7m 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. But either way, EFORT Intelligent Equipment has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

While EFORT Intelligent Equipment's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥211m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for EFORT Intelligent Equipment that you should be aware of before investing here.

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.