Epoxy Base Electronic Material (SHSE:603002) Seems To Use Debt Quite Sensibly

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 Epoxy Base Electronic Material Corporation Limited (SHSE:603002) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Epoxy Base Electronic Material

How Much Debt Does Epoxy Base Electronic Material Carry?

As you can see below, Epoxy Base Electronic Material had CN¥139.6m of debt at June 2024, down from CN¥297.9m a year prior. But on the other hand it also has CN¥1.87b in cash, leading to a CN¥1.73b net cash position.

How Strong Is Epoxy Base Electronic Material's Balance Sheet?

We can see from the most recent balance sheet that Epoxy Base Electronic Material had liabilities of CN¥931.4m falling due within a year, and liabilities of CN¥144.1m due beyond that. Offsetting this, it had CN¥1.87b in cash and CN¥965.1m in receivables that were due within 12 months. So it can boast CN¥1.76b more liquid assets than total liabilities.

This luscious liquidity implies that Epoxy Base Electronic Material's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Epoxy Base Electronic Material has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Epoxy Base Electronic Material's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Epoxy Base Electronic Material can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Epoxy Base Electronic Material 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, Epoxy Base Electronic Material created free cash flow amounting to 5.1% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Epoxy Base Electronic Material has CN¥1.73b in net cash and a decent-looking balance sheet. So we are not troubled with Epoxy Base Electronic Material'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 3 warning signs for Epoxy Base Electronic Material that you should be aware of before investing here.

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.