Does EZconn (TWSE:6442) Have A Healthy Balance Sheet?

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. We note that EZconn Corporation (TWSE:6442) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for EZconn

What Is EZconn's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 EZconn had debt of NT$668.0m, up from NT$554.0m in one year. But on the other hand it also has NT$1.38b in cash, leading to a NT$709.5m net cash position.

How Healthy Is EZconn's Balance Sheet?

The latest balance sheet data shows that EZconn had liabilities of NT$1.65b due within a year, and liabilities of NT$480.3m falling due after that. Offsetting these obligations, it had cash of NT$1.38b as well as receivables valued at NT$1.09b due within 12 months. So it actually has NT$333.6m more liquid assets than total liabilities.

This state of affairs indicates that EZconn's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$30.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that EZconn has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that EZconn grew its EBIT by 127% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is EZconn's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While EZconn has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, EZconn recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that EZconn has net cash of NT$709.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 127% year-on-year EBIT growth. So we don't think EZconn's use of debt is risky. 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. Be aware that EZconn is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.