Is Epoxy Base Electronic Material (SHSE:603002) Using Too Much Debt?

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.' 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. Importantly, Epoxy Base Electronic Material Corporation Limited (SHSE:603002) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Epoxy Base Electronic Material

What Is Epoxy Base Electronic Material's Debt?

You can click the graphic below for the historical numbers, but it shows that Epoxy Base Electronic Material had CN¥252.9m of debt in September 2024, down from CN¥326.6m, one year before. But it also has CN¥1.54b in cash to offset that, meaning it has CN¥1.28b net cash.

A Look At Epoxy Base Electronic Material's Liabilities

According to the last reported balance sheet, Epoxy Base Electronic Material had liabilities of CN¥934.8m due within 12 months, and liabilities of CN¥224.8m due beyond 12 months. Offsetting this, it had CN¥1.54b in cash and CN¥906.6m in receivables that were due within 12 months. So it actually has CN¥1.28b more liquid assets than total liabilities.

It's good to see that Epoxy Base Electronic Material has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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 57% in the last twelve months. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Epoxy Base Electronic Material burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

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¥1.28b, as well as more liquid assets than liabilities. So we don't have any problem with Epoxy Base Electronic Material's use of debt. 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 5 warning signs for Epoxy Base Electronic Material (2 don't sit too well with us) you should be aware of.

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.