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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.' 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 Eco-Tek Holdings Limited (HKG:8169) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Eco-Tek Holdings
What Is Eco-Tek Holdings's Net Debt?
The chart below, which you can click on for greater detail, shows that Eco-Tek Holdings had HK$19.0m in debt in April 2019; about the same as the year before. However, it does have HK$42.4m in cash offsetting this, leading to net cash of HK$23.4m.
How Strong Is Eco-Tek Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Eco-Tek Holdings had liabilities of HK$41.9m due within 12 months and liabilities of HK$26.6m due beyond that. On the other hand, it had cash of HK$42.4m and HK$26.7m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
This state of affairs indicates that Eco-Tek Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the HK$58.5m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Eco-Tek Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that Eco-Tek Holdings saw its EBIT decline by 3.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Eco-Tek Holdings'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.