We Think EZconn (TWSE:6442) Can Manage Its Debt With Ease

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 EZconn Corporation (TWSE:6442) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for EZconn

How Much Debt Does EZconn Carry?

As you can see below, at the end of September 2024, EZconn had NT$618.0m of debt, up from NT$554.0m a year ago. Click the image for more detail. But on the other hand it also has NT$1.89b in cash, leading to a NT$1.27b net cash position.

A Look At EZconn's Liabilities

We can see from the most recent balance sheet that EZconn had liabilities of NT$1.89b falling due within a year, and liabilities of NT$494.7m due beyond that. Offsetting these obligations, it had cash of NT$1.89b as well as receivables valued at NT$631.8m due within 12 months. So it actually has NT$137.4m 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$36.7b 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.

Better yet, EZconn grew its EBIT by 401% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since EZconn 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, EZconn generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that EZconn has net cash of NT$1.27b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$230m, being 80% of its EBIT. So is EZconn's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that EZconn is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.