EverFocus Electronics (TPE:5484) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies EverFocus Electronics Corporation (TPE:5484) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for EverFocus Electronics

What Is EverFocus Electronics's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 EverFocus Electronics had debt of NT$46.9m, up from NT$27.7m in one year. But it also has NT$157.6m in cash to offset that, meaning it has NT$110.7m net cash.

A Look At EverFocus Electronics' Liabilities

Zooming in on the latest balance sheet data, we can see that EverFocus Electronics had liabilities of NT$192.8m due within 12 months and liabilities of NT$3.28m due beyond that. Offsetting this, it had NT$157.6m in cash and NT$100.3m in receivables that were due within 12 months. So it actually has NT$61.7m more liquid assets than total liabilities.

This surplus suggests that EverFocus Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that EverFocus Electronics 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 EverFocus Electronics 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, EverFocus Electronics reported revenue of NT$310m, which is a gain of 8.8%, 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.

So How Risky Is EverFocus Electronics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months EverFocus Electronics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$90m and booked a NT$48m accounting loss. However, it has net cash of NT$110.7m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for EverFocus Electronics you should be aware of, and 1 of them is concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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