Is EBM Technologies (GTSM:8409) Weighed On By Its Debt Load?

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. We note that EBM Technologies Incorporated (GTSM:8409) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for EBM Technologies

What Is EBM Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 EBM Technologies had debt of NT$89.0m, up from NT$55.0m in one year. However, its balance sheet shows it holds NT$100.6m in cash, so it actually has NT$11.6m net cash.

How Healthy Is EBM Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EBM Technologies had liabilities of NT$140.3m due within 12 months and liabilities of NT$12.7m due beyond that. Offsetting this, it had NT$100.6m in cash and NT$46.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$6.03m.

Having regard to EBM Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$515.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, EBM Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

In the last year EBM Technologies had a loss before interest and tax, and actually shrunk its revenue by 8.3%, to NT$215m. That's not what we would hope to see.

So How Risky Is EBM Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$10m and booked a NT$30m accounting loss. Given it only has net cash of NT$11.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example, we've discovered 1 warning sign for EBM Technologies that you should be aware of before investing here.

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. 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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