Is EverFocus Electronics (TWSE:5484) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that EverFocus Electronics Corporation (TWSE:5484) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for EverFocus Electronics

How Much Debt Does EverFocus Electronics Carry?

The image below, which you can click on for greater detail, shows that at September 2024 EverFocus Electronics had debt of NT$203.6m, up from NT$134.2m in one year. However, it does have NT$221.9m in cash offsetting this, leading to net cash of NT$18.3m.

How Strong Is EverFocus Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EverFocus Electronics had liabilities of NT$357.0m due within 12 months and liabilities of NT$14.3m due beyond that. On the other hand, it had cash of NT$221.9m and NT$63.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$85.5m.

Of course, EverFocus Electronics has a market capitalization of NT$3.82b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, EverFocus Electronics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since EverFocus Electronics 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.

In the last year EverFocus Electronics wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to NT$455m. We usually like to see faster growth from unprofitable companies, but each to their own.

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 in the last year EverFocus Electronics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through NT$38m of cash and made a loss of NT$79m. While this does make the company a bit risky, it's important to remember it has net cash of NT$18.3m. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 1 warning sign for EverFocus Electronics that you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.