Is Everdisplay Optronics (Shanghai) (SHSE:688538) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Everdisplay Optronics (Shanghai) Co., Ltd. (SHSE:688538) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Everdisplay Optronics (Shanghai)

What Is Everdisplay Optronics (Shanghai)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Everdisplay Optronics (Shanghai) had CN¥15.0b of debt, an increase on CN¥14.3b, over one year. On the flip side, it has CN¥2.05b in cash leading to net debt of about CN¥13.0b.

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

According to the last reported balance sheet, Everdisplay Optronics (Shanghai) had liabilities of CN¥4.61b due within 12 months, and liabilities of CN¥12.7b due beyond 12 months. On the other hand, it had cash of CN¥2.05b and CN¥628.7m worth of receivables due within a year. So its liabilities total CN¥14.6b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Everdisplay Optronics (Shanghai) has a market capitalization of CN¥30.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Everdisplay Optronics (Shanghai)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Everdisplay Optronics (Shanghai) wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to CN¥4.7b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Everdisplay Optronics (Shanghai) still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥2.2b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥1.2b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. Case in point: We've spotted 2 warning signs for Everdisplay Optronics (Shanghai) 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.

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

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.