Is Ecovacs Robotics (SHSE:603486) Using Too Much Debt?

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.' 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. Importantly, Ecovacs Robotics Co., Ltd. (SHSE:603486) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ecovacs Robotics

What Is Ecovacs Robotics's Net Debt?

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.

A Look At Ecovacs Robotics' Liabilities

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. On the other hand, it had cash of CN¥4.20b and CN¥1.49b worth of receivables due within a year. So its liabilities total CN¥622.7m more than the combination of its cash and short-term receivables.

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¥32.7b company is short on cash, but still worth keeping an eye on the balance sheet. 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 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Ecovacs Robotics recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Ecovacs Robotics has CN¥2.51b in net cash. So we don't have any problem with Ecovacs Robotics's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Ecovacs Robotics .

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.