EV Advanced MaterialLtd (KOSDAQ:131400) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies EV Advanced Material Co.,Ltd (KOSDAQ:131400) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does EV Advanced MaterialLtd Carry?

As you can see below, at the end of December 2024, EV Advanced MaterialLtd had ₩4.93b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has ₩27.2b in cash, leading to a ₩22.3b net cash position.

How Healthy Is EV Advanced MaterialLtd's Balance Sheet?

We can see from the most recent balance sheet that EV Advanced MaterialLtd had liabilities of ₩23.3b falling due within a year, and liabilities of ₩5.10b due beyond that. On the other hand, it had cash of ₩27.2b and ₩12.4b worth of receivables due within a year. So it actually has ₩11.3b more liquid assets than total liabilities.

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

View our latest analysis for EV Advanced MaterialLtd

It was also good to see that despite losing money on the EBIT line last year, EV Advanced MaterialLtd turned things around in the last 12 months, delivering and EBIT of ₩2.6b. There's no doubt that we learn most about debt from the balance sheet. But it is EV Advanced MaterialLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. EV Advanced MaterialLtd 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. Happily for any shareholders, EV Advanced MaterialLtd actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that EV Advanced MaterialLtd has net cash of ₩22.3b, as well as more liquid assets than liabilities. The cherry on top was that in converted 220% of that EBIT to free cash flow, bringing in ₩5.7b. So we don't think EV Advanced MaterialLtd's use of debt is risky. 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 - EV Advanced MaterialLtd has 1 warning sign we think you should be aware of.

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.