Advertisement

Does Eckoh (LON:ECK) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Eckoh plc (LON:ECK) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Eckoh

What Is Eckoh's Debt?

You can click the graphic below for the historical numbers, but it shows that Eckoh had UK£1.95m of debt in March 2020, down from UK£3.25m, one year before. But it also has UK£13.5m in cash to offset that, meaning it has UK£11.6m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Eckoh's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eckoh had liabilities of UK£22.3m due within 12 months and liabilities of UK£1.30m due beyond that. On the other hand, it had cash of UK£13.5m and UK£5.21m worth of receivables due within a year. So it has liabilities totalling UK£4.8m more than its cash and near-term receivables, combined.

Given Eckoh has a market capitalization of UK£158.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Eckoh boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Eckoh grew its EBIT by 172% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Eckoh 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Eckoh 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. Happily for any shareholders, Eckoh actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Eckoh's liabilities, but we can be reassured by the fact it has has net cash of UK£11.6m. The cherry on top was that in converted 315% of that EBIT to free cash flow, bringing in UK£5.6m. So we don't think Eckoh's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Eckoh's earnings per share history for free.

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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.