Does ES Ceramics Technology Berhad (KLSE:ESCERAM) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies ES Ceramics Technology Berhad (KLSE:ESCERAM) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ES Ceramics Technology Berhad

What Is ES Ceramics Technology Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of May 2023 ES Ceramics Technology Berhad had RM23.5m of debt, an increase on RM209.0k, over one year. But on the other hand it also has RM50.9m in cash, leading to a RM27.5m net cash position.

A Look At ES Ceramics Technology Berhad's Liabilities

We can see from the most recent balance sheet that ES Ceramics Technology Berhad had liabilities of RM103.7m falling due within a year, and liabilities of RM30.4m due beyond that. Offsetting these obligations, it had cash of RM50.9m as well as receivables valued at RM112.1m due within 12 months. So it actually has RM28.9m more liquid assets than total liabilities.

This surplus suggests that ES Ceramics Technology Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, ES Ceramics Technology Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that ES Ceramics Technology Berhad's load is not too heavy, because its EBIT was down 50% 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 you can't view debt in total isolation; since ES Ceramics Technology Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. ES Ceramics Technology Berhad 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, ES Ceramics Technology Berhad produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case ES Ceramics Technology Berhad has RM27.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM18m, being 67% of its EBIT. So we are not troubled with ES Ceramics Technology Berhad's debt use. 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. We've identified 4 warning signs with ES Ceramics Technology Berhad , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.