Is Eastech Holding (TPE:5225) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Eastech Holding Limited (TPE:5225) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Eastech Holding

How Much Debt Does Eastech Holding Carry?

As you can see below, at the end of September 2020, Eastech Holding had NT$1.38b of debt, up from NT$875.1m a year ago. Click the image for more detail. However, it does have NT$1.53b in cash offsetting this, leading to net cash of NT$147.0m.

How Healthy Is Eastech Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eastech Holding had liabilities of NT$5.07b due within 12 months and liabilities of NT$476.0m due beyond that. Offsetting this, it had NT$1.53b in cash and NT$2.50b in receivables that were due within 12 months. So its liabilities total NT$1.52b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of NT$1.60b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Eastech Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Eastech Holding'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.

In the last year Eastech Holding had a loss before interest and tax, and actually shrunk its revenue by 18%, to NT$8.7b. We would much prefer see growth.

So How Risky Is Eastech Holding?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Eastech Holding had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$352m and booked a NT$413m accounting loss. With only NT$147.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Eastech Holding (2 are concerning) you should be aware of.

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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