Is EZconn (TPE:6442) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies EZconn Corporation (TPE:6442) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for EZconn

How Much Debt Does EZconn Carry?

As you can see below, at the end of September 2020, EZconn had NT$500.0m of debt, up from NT$450.0m a year ago. Click the image for more detail. But on the other hand it also has NT$918.6m in cash, leading to a NT$418.6m net cash position.

How Strong Is EZconn's Balance Sheet?

According to the last reported balance sheet, EZconn had liabilities of NT$1.02b due within 12 months, and liabilities of NT$141.4m due beyond 12 months. On the other hand, it had cash of NT$918.6m and NT$591.7m worth of receivables due within a year. So it actually has NT$353.6m more liquid assets than total liabilities.

This excess liquidity suggests that EZconn is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, EZconn boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since EZconn 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, EZconn made a loss at the EBIT level, and saw its revenue drop to NT$2.3b, which is a fall of 14%. That's not what we would hope to see.

So How Risky Is EZconn?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year EZconn had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of NT$142m and booked a NT$79m accounting loss. Given it only has net cash of NT$418.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for EZconn (of which 1 shouldn't be ignored!) you should know about.

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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