Does eprint Group (HKG:1884) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, eprint Group Limited (HKG:1884) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for eprint Group

What Is eprint Group's Debt?

The image below, which you can click on for greater detail, shows that eprint Group had debt of HK$20.1m at the end of September 2020, a reduction from HK$22.1m over a year. However, it does have HK$139.2m in cash offsetting this, leading to net cash of HK$119.1m.

A Look At eprint Group's Liabilities

Zooming in on the latest balance sheet data, we can see that eprint Group had liabilities of HK$80.2m due within 12 months and liabilities of HK$17.2m due beyond that. Offsetting these obligations, it had cash of HK$139.2m as well as receivables valued at HK$4.92m due within 12 months. So it actually has HK$46.7m more liquid assets than total liabilities.

This surplus strongly suggests that eprint Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that eprint Group 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 eprint Group if management cannot prevent a repeat of the 58% 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 eprint Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. eprint Group 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, eprint Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case eprint Group has HK$119.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 188% of that EBIT to free cash flow, bringing in HK$38m. So is eprint Group's debt a risk? It doesn't seem so to us. 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 4 warning signs for eprint Group (1 is potentially serious) 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. 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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