Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Epoxy Base Electronic Material's Debt?

As you can see below, Epoxy Base Electronic Material had CN¥139.6m of debt at June 2024, down from CN¥297.9m a year prior. But it also has CN¥1.87b in cash to offset that, meaning it has CN¥1.73b net cash.

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¥931.4m due within 12 months and liabilities of CN¥144.1m due beyond that. On the other hand, it had cash of CN¥1.87b and CN¥965.1m worth of receivables due within a year. So it actually has CN¥1.76b more liquid assets than total liabilities.

This surplus liquidity suggests that Epoxy Base Electronic Material's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Epoxy Base Electronic Material boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Epoxy Base Electronic Material's saving grace is its low debt levels, because its EBIT has tanked 35% 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 ultimately the future profitability of the business will decide if Epoxy Base Electronic Material can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Epoxy Base Electronic Material reported free cash flow worth 5.1% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Epoxy Base Electronic Material has net cash of CN¥1.73b, as well as more liquid assets than liabilities. So we are not troubled with Epoxy Base Electronic Material's debt use. 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. For instance, we've identified 3 warning signs for Epoxy Base Electronic Material 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.