Here's Why Eagle Veterinary TechnologyLtd (KOSDAQ:044960) Can Manage Its Debt Responsibly

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.' 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. We note that Eagle Veterinary Technology Co.,Ltd (KOSDAQ:044960) does have debt on its balance sheet. But is this debt a concern to shareholders?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Eagle Veterinary TechnologyLtd

What Is Eagle Veterinary TechnologyLtd's Net Debt?

As you can see below, Eagle Veterinary TechnologyLtd had ₩5.46b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₩6.81b in cash, so it actually has ₩1.35b net cash.

A Look At Eagle Veterinary TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Eagle Veterinary TechnologyLtd had liabilities of ₩10.5b due within 12 months and liabilities of ₩3.19b due beyond that. On the other hand, it had cash of ₩6.81b and ₩9.90b worth of receivables due within a year. So it can boast ₩3.01b more liquid assets than total liabilities.

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

Eagle Veterinary TechnologyLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is Eagle Veterinary TechnologyLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. While Eagle Veterinary TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Eagle Veterinary TechnologyLtd produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Eagle Veterinary TechnologyLtd has net cash of ₩1.35b, as well as more liquid assets than liabilities. So we don't think Eagle Veterinary TechnologyLtd's use of debt is risky. 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 1 warning sign for Eagle Veterinary TechnologyLtd 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.