Health Check: How Prudently Does Everspring Industry (TPE:2390) Use Debt?

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 Everspring Industry Co., Ltd. (TPE:2390) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Everspring Industry

What Is Everspring Industry's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Everspring Industry had debt of NT$370.7m, up from NT$291.4m in one year. However, its balance sheet shows it holds NT$764.7m in cash, so it actually has NT$394.0m net cash.

A Look At Everspring Industry's Liabilities

According to the last reported balance sheet, Everspring Industry had liabilities of NT$392.9m due within 12 months, and liabilities of NT$174.3m due beyond 12 months. Offsetting this, it had NT$764.7m in cash and NT$76.4m in receivables that were due within 12 months. So it can boast NT$273.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Everspring Industry could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Everspring Industry has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Everspring Industry will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Everspring Industry made a loss at the EBIT level, and saw its revenue drop to NT$544m, which is a fall of 13%. We would much prefer see growth.

So How Risky Is Everspring Industry?

While Everspring Industry lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$125m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 Everspring Industry .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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