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

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.' 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 can see that EO Technics Co., Ltd. (KOSDAQ:039030) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See our latest analysis for EO Technics

How Much Debt Does EO Technics Carry?

As you can see below, EO Technics had ₩9.00b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩188.4b in cash, leading to a ₩179.4b net cash position.

How Healthy Is EO Technics' Balance Sheet?

The latest balance sheet data shows that EO Technics had liabilities of ₩48.0b due within a year, and liabilities of ₩2.08b falling due after that. On the other hand, it had cash of ₩188.4b and ₩91.5b worth of receivables due within a year. So it actually has ₩229.8b 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!

The modesty of its debt load may become crucial for EO Technics if management cannot prevent a repeat of the 30% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if EO Technics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, EO Technics produced sturdy free cash flow equating to 62% 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 EO Technics has net cash of ₩179.4b, as well as more liquid assets than liabilities. So we don't have any problem with EO Technics's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for EO Technics you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.