Is EBM Technologies (GTSM:8409) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that EBM Technologies Incorporated (GTSM:8409) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for EBM Technologies

What Is EBM Technologies's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 EBM Technologies had debt of NT$75.0m, up from NT$55.0m in one year. But it also has NT$103.5m in cash to offset that, meaning it has NT$28.5m net cash.

How Healthy Is EBM Technologies's Balance Sheet?

According to the last reported balance sheet, EBM Technologies had liabilities of NT$124.7m due within 12 months, and liabilities of NT$11.1m due beyond 12 months. On the other hand, it had cash of NT$103.5m and NT$20.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$12.2m.

Since publicly traded EBM Technologies shares are worth a total of NT$504.0m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, EBM Technologies 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 EBM Technologies'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, EBM Technologies reported revenue of NT$248m, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is EBM Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that EBM Technologies 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$4.0m and booked a NT$20m accounting loss. With only NT$28.5m 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with EBM Technologies , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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