Does EO Technics (KOSDAQ:039030) Have A Healthy Balance Sheet?

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.' 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 can see that EO Technics Co., Ltd. (KOSDAQ:039030) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for EO Technics

What Is EO Technics's Debt?

The image below, which you can click on for greater detail, shows that EO Technics had debt of ₩12.0b at the end of September 2020, a reduction from ₩13.7b over a year. But on the other hand it also has ₩85.6b in cash, leading to a ₩73.6b net cash position.

How Healthy Is EO Technics' Balance Sheet?

According to the last reported balance sheet, EO Technics had liabilities of ₩62.1b due within 12 months, and liabilities of ₩400.3m due beyond 12 months. Offsetting these obligations, it had cash of ₩85.6b as well as receivables valued at ₩95.5b due within 12 months. So it can boast ₩118.7b more liquid assets than total liabilities.

This surplus suggests that EO Technics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, EO Technics boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that EO Technics grew its EBIT by 4,022% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine EO Technics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. EO Technics 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. Over the last three years, EO Technics actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that EO Technics has net cash of ₩73.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩28b, being 108% of its EBIT. So we don't think EO Technics's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of EO Technics's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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