Is Ecovacs Robotics (SHSE:603486) 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.' 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 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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ecovacs Robotics

How Much Debt Does Ecovacs Robotics Carry?

The chart below, which you can click on for greater detail, shows that Ecovacs Robotics had CN¥1.69b in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥4.20b in cash, leading to a CN¥2.51b net cash position.

How Healthy Is Ecovacs Robotics' Balance Sheet?

According to the last reported balance sheet, Ecovacs Robotics had liabilities of CN¥5.21b due within 12 months, and liabilities of CN¥1.11b due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.20b as well as receivables valued at CN¥1.49b due within 12 months. So its liabilities total CN¥622.7m more than the combination of its cash and short-term receivables.

Since publicly traded Ecovacs Robotics shares are worth a total of CN¥26.6b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Ecovacs Robotics boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Ecovacs Robotics if management cannot prevent a repeat of the 53% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ecovacs Robotics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Ecovacs Robotics's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Ecovacs Robotics's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.51b. So we don't have any problem with Ecovacs Robotics's use of debt. 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 - Ecovacs Robotics has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.