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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Epoxy Base Electronic Material Corporation Limited (SHSE:603002) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Epoxy Base Electronic Material

What Is Epoxy Base Electronic Material's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Epoxy Base Electronic Material had debt of CN¥326.6m, up from CN¥97.8m in one year. But on the other hand it also has CN¥2.48b in cash, leading to a CN¥2.15b net cash position.

A Look At Epoxy Base Electronic Material's Liabilities

Zooming in on the latest balance sheet data, we can see that Epoxy Base Electronic Material had liabilities of CN¥1.22b due within 12 months and liabilities of CN¥144.8m due beyond that. Offsetting these obligations, it had cash of CN¥2.48b as well as receivables valued at CN¥1.08b due within 12 months. So it actually has CN¥2.19b more liquid assets than total liabilities.

This surplus strongly suggests that Epoxy Base Electronic Material has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Epoxy Base Electronic Material has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Epoxy Base Electronic Material's saving grace is its low debt levels, because its EBIT has tanked 56% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Epoxy Base Electronic Material's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Epoxy Base Electronic Material may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Epoxy Base Electronic Material produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Epoxy Base Electronic Material has CN¥2.15b in net cash and a decent-looking balance sheet. So we are not troubled with Epoxy Base Electronic Material's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Epoxy Base Electronic Material (2 are a bit concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.