Here's Why EcoBio Holdings (KOSDAQ:038870) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, EcoBio Holdings Co., Ltd. (KOSDAQ:038870) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 EcoBio Holdings

How Much Debt Does EcoBio Holdings Carry?

The chart below, which you can click on for greater detail, shows that EcoBio Holdings had ₩14.5b in debt in March 2024; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is EcoBio Holdings' Balance Sheet?

We can see from the most recent balance sheet that EcoBio Holdings had liabilities of ₩19.9b falling due within a year, and liabilities of ₩3.18b due beyond that. Offsetting these obligations, it had cash of ₩133.3m as well as receivables valued at ₩35.6b due within 12 months. So it can boast ₩12.7b more liquid assets than total liabilities.

It's good to see that EcoBio Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. When analysing debt levels, the balance sheet is the obvious place to start. But it is EcoBio Holdings'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.

Over 12 months, EcoBio Holdings made a loss at the EBIT level, and saw its revenue drop to ₩15b, which is a fall of 9.7%. That's not what we would hope to see.

Caveat Emptor

Importantly, EcoBio Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩3.6b at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for EcoBio Holdings you should know about.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com