These 4 Measures Indicate That Empyrean Technology (SZSE:301269) Is Using Debt Safely

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.' 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. Importantly, Empyrean Technology Co., Ltd. (SZSE:301269) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Empyrean Technology

How Much Debt Does Empyrean Technology Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Empyrean Technology had debt of CN¥125.9m, up from CN¥117.2m in one year. But it also has CN¥2.98b in cash to offset that, meaning it has CN¥2.85b net cash.

How Healthy Is Empyrean Technology's Balance Sheet?

We can see from the most recent balance sheet that Empyrean Technology had liabilities of CN¥362.3m falling due within a year, and liabilities of CN¥233.7m due beyond that. Offsetting these obligations, it had cash of CN¥2.98b as well as receivables valued at CN¥253.0m due within 12 months. So it can boast CN¥2.64b more liquid assets than total liabilities.

This short term liquidity is a sign that Empyrean Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Empyrean Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Empyrean Technology grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Empyrean Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Empyrean Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Empyrean Technology actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Empyrean Technology has net cash of CN¥2.85b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥54m, being 114% of its EBIT. So we don't think Empyrean Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Empyrean Technology 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.

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