Health Check: How Prudently Does EGTRONICSLtd (KOSDAQ:377330) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that EGTRONICS Co.,Ltd. (KOSDAQ:377330) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for EGTRONICSLtd

What Is EGTRONICSLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 EGTRONICSLtd had debt of ₩7.65b, up from ₩3.85b in one year. But on the other hand it also has ₩19.2b in cash, leading to a ₩11.6b net cash position.

A Look At EGTRONICSLtd's Liabilities

The latest balance sheet data shows that EGTRONICSLtd had liabilities of ₩13.8b due within a year, and liabilities of ₩2.73b falling due after that. Offsetting this, it had ₩19.2b in cash and ₩8.67b in receivables that were due within 12 months. So it can boast ₩11.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that EGTRONICSLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that EGTRONICSLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is EGTRONICSLtd'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.

In the last year EGTRONICSLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to ₩40b. With any luck the company will be able to grow its way to profitability.

So How Risky Is EGTRONICSLtd?

Although EGTRONICSLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩3.7b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 29% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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 3 warning signs for EGTRONICSLtd 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.