Is EO Technics (KOSDAQ:039030) A Risky Investment?

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. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 ₩13.9b over a year. But on the other hand it also has ₩85.6b in cash, leading to a ₩73.6b net cash position.

How Strong Is EO Technics's Balance Sheet?

The latest balance sheet data shows that EO Technics had liabilities of ₩62.1b due within a year, and liabilities of ₩400.3m falling due after that. Offsetting these obligations, it had cash of ₩85.6b as well as receivables valued at ₩95.5b due within 12 months. So it actually has ₩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!

Better yet, EO Technics grew its EBIT by 4,022% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case EO Technics has ₩73.6b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in ₩28b. So is EO Technics's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in EO Technics, you may well want to click here to check an interactive graph of its earnings per share history.

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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