Eastech Holding (TWSE:5225) Seems To Use Debt Rather Sparingly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Eastech Holding Limited (TWSE:5225) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Eastech Holding

What Is Eastech Holding's Net Debt?

The image below, which you can click on for greater detail, shows that Eastech Holding had debt of NT$143.2m at the end of December 2023, a reduction from NT$333.9m over a year. However, it does have NT$2.19b in cash offsetting this, leading to net cash of NT$2.04b.

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$3.06b due within 12 months and liabilities of NT$104.5m due beyond that. Offsetting this, it had NT$2.19b in cash and NT$1.67b in receivables that were due within 12 months. So it can boast NT$693.2m more liquid assets than total liabilities.

This surplus suggests that Eastech Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Eastech Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Eastech Holding has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Eastech Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Eastech Holding 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, Eastech Holding actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Eastech Holding has net cash of NT$2.04b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$1.1b, being 207% of its EBIT. So is Eastech Holding's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Eastech Holding .

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.