Here's Why Everdisplay Optronics (Shanghai) (SHSE:688538) Can Afford Some 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. We can see that Everdisplay Optronics (Shanghai) Co., Ltd. (SHSE:688538) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Everdisplay Optronics (Shanghai)

How Much Debt Does Everdisplay Optronics (Shanghai) Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Everdisplay Optronics (Shanghai) had debt of CN¥14.6b, up from CN¥13.4b in one year. However, it also had CN¥2.06b in cash, and so its net debt is CN¥12.5b.

How Healthy Is Everdisplay Optronics (Shanghai)'s Balance Sheet?

The latest balance sheet data shows that Everdisplay Optronics (Shanghai) had liabilities of CN¥3.27b due within a year, and liabilities of CN¥13.1b falling due after that. On the other hand, it had cash of CN¥2.06b and CN¥392.3m worth of receivables due within a year. So its liabilities total CN¥13.9b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Everdisplay Optronics (Shanghai) is worth CN¥28.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Everdisplay Optronics (Shanghai) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Everdisplay Optronics (Shanghai) made a loss at the EBIT level, and saw its revenue drop to CN¥3.3b, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

While Everdisplay Optronics (Shanghai)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥2.9b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥1.5b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Everdisplay Optronics (Shanghai) that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.