Is Epoxy Base Electronic Material (SHSE:603002) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Epoxy Base Electronic Material Corporation Limited (SHSE:603002) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Epoxy Base Electronic Material

What Is Epoxy Base Electronic Material's Debt?

The image below, which you can click on for greater detail, shows that Epoxy Base Electronic Material had debt of CN¥178.0m at the end of March 2024, a reduction from CN¥226.2m over a year. However, its balance sheet shows it holds CN¥1.88b in cash, so it actually has CN¥1.70b net cash.

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

Zooming in on the latest balance sheet data, we can see that Epoxy Base Electronic Material had liabilities of CN¥939.0m due within 12 months and liabilities of CN¥144.4m due beyond that. Offsetting this, it had CN¥1.88b in cash and CN¥1.01b in receivables that were due within 12 months. So it actually has CN¥1.80b more liquid assets than total liabilities.

This surplus strongly suggests that Epoxy Base Electronic Material has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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.

The modesty of its debt load may become crucial for Epoxy Base Electronic Material if management cannot prevent a repeat of the 37% 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Epoxy Base Electronic Material'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 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's free cash flow amounted to 24% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Epoxy Base Electronic Material has net cash of CN¥1.70b, as well as more liquid assets than liabilities. So we are not troubled with Epoxy Base Electronic Material's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Epoxy Base Electronic Material that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com