Here's Why Ecovacs Robotics (SHSE:603486) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Ecovacs Robotics Co., Ltd. (SHSE:603486) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ecovacs Robotics

What Is Ecovacs Robotics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ecovacs Robotics had CN¥2.07b of debt in March 2024, down from CN¥2.28b, one year before. But on the other hand it also has CN¥5.27b in cash, leading to a CN¥3.20b net cash position.

How Strong Is Ecovacs Robotics' Balance Sheet?

The latest balance sheet data shows that Ecovacs Robotics had liabilities of CN¥5.51b due within a year, and liabilities of CN¥1.29b falling due after that. Offsetting these obligations, it had cash of CN¥5.27b as well as receivables valued at CN¥1.62b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Ecovacs Robotics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥30.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Ecovacs Robotics has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Ecovacs Robotics's load is not too heavy, because its EBIT was down 68% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ecovacs Robotics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ecovacs Robotics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Ecovacs Robotics produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ecovacs Robotics has net cash of CN¥3.20b, as well as more liquid assets than liabilities. So we are not troubled with Ecovacs Robotics's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Ecovacs Robotics that you should be aware of before investing here.

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.

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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.