David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Ecovacs Robotics Co., Ltd. (SHSE:603486) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Ecovacs Robotics
What Is Ecovacs Robotics's 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 it also has CN„5.27b in cash to offset that, meaning it has CN„3.20b net cash.
A Look At Ecovacs Robotics' Liabilities
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. On the other hand, it had cash of CN„5.27b and CN„1.62b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
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 while it's hard to imagine that the CN„21.7b company is struggling for cash, we still think it's worth monitoring its 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 a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ecovacs Robotics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the most recent three years, Ecovacs Robotics recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to investigate a company's debt, in this case Ecovacs Robotics has CN„3.20b in net cash and a decent-looking balance sheet. So we are not troubled with Ecovacs Robotics's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Ecovacs Robotics you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About SHSE:603486
Ecovacs Robotics
Engages in the research, development, design, manufacture, and sale of robotic products in China.
Excellent balance sheet with moderate growth potential.