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.' 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 can see that Empyrean Technology Co., Ltd. (SZSE:301269) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Empyrean Technology
What Is Empyrean Technology's Net Debt?
As you can see below, Empyrean Technology had CN¥117.2m of debt at September 2023, down from CN¥312.6m a year prior. However, it does have CN¥3.10b in cash offsetting this, leading to net cash of CN¥2.98b.
How Strong Is Empyrean Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Empyrean Technology had liabilities of CN¥369.4m due within 12 months and liabilities of CN¥214.4m due beyond that. On the other hand, it had cash of CN¥3.10b and CN¥196.3m worth of receivables due within a year. So it actually has CN¥2.71b more liquid assets than total liabilities.
This short term liquidity is a sign that Empyrean Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Empyrean Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Empyrean Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Empyrean Technology reported revenue of CN¥955m, which is a gain of 33%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Empyrean Technology?
While Empyrean Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥244m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Keeping in mind its 33% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Empyrean Technology that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.