EO Technics (KOSDAQ:039030) Seems To Use Debt Quite Sensibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, EO Technics Co., Ltd. (KOSDAQ:039030) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for EO Technics

What Is EO Technics's Net Debt?

As you can see below, at the end of March 2024, EO Technics had ₩9.00b of debt, up from ₩7.00b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩235.6b in cash, so it actually has ₩226.6b net cash.

How Strong Is EO Technics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EO Technics had liabilities of ₩64.7b due within 12 months and liabilities of ₩2.52b due beyond that. Offsetting this, it had ₩235.6b in cash and ₩84.7b in receivables that were due within 12 months. So it can boast ₩253.2b 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. Simply put, the fact that EO Technics 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 EO Technics if management cannot prevent a repeat of the 70% 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. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While EO Technics 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, EO Technics generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case EO Technics has ₩226.6b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in ₩56b. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for EO Technics that you should be aware of before investing here.

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. 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.

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