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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Eleco Plc (LON:ELCO) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Eleco

How Much Debt Does Eleco Carry?

The image below, which you can click on for greater detail, shows that Eleco had debt of UK£5.34m at the end of June 2020, a reduction from UK£6.96m over a year. However, it does have UK£9.78m in cash offsetting this, leading to net cash of UK£4.44m.

How Healthy Is Eleco's Balance Sheet?

The latest balance sheet data shows that Eleco had liabilities of UK£12.3m due within a year, and liabilities of UK£6.84m falling due after that. Offsetting these obligations, it had cash of UK£9.78m as well as receivables valued at UK£3.12m due within 12 months. So its liabilities total UK£6.20m more than the combination of its cash and short-term receivables.

Since publicly traded Eleco shares are worth a total of UK£68.5m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Eleco boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Eleco grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Eleco 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.