Is Ecocera Optronics (GTSM:6597) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, Ecocera Optronics Co., Ltd. (GTSM:6597) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ecocera Optronics

How Much Debt Does Ecocera Optronics Carry?

The image below, which you can click on for greater detail, shows that Ecocera Optronics had debt of NT$219.4m at the end of December 2020, a reduction from NT$240.0m over a year. However, it also had NT$25.2m in cash, and so its net debt is NT$194.3m.

How Strong Is Ecocera Optronics' Balance Sheet?

According to the last reported balance sheet, Ecocera Optronics had liabilities of NT$305.2m due within 12 months, and liabilities of NT$15.0m due beyond 12 months. Offsetting these obligations, it had cash of NT$25.2m as well as receivables valued at NT$147.3m due within 12 months. So it has liabilities totalling NT$147.7m more than its cash and near-term receivables, combined.

Ecocera Optronics has a market capitalization of NT$477.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ecocera Optronics 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.

Over 12 months, Ecocera Optronics reported revenue of NT$433m, which is a gain of 6.6%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Ecocera Optronics had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$29m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$32m. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Ecocera Optronics .

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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