Here’s why Eco World International Berhad (KLSE: EWINT) can responsibly manage its debt
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Eco World International Berhad (KLSE: EWINT) carries a debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Eco World International Berhad
How much debt does Eco World International Berhad have?
You can click on the graph below for historical figures, but it shows Eco World International Berhad had a debt of RM 1.07 billion in July 2021, up from RM 1.24 billion a year earlier. However, because it has a cash reserve of RM 291.7 million, its net debt is less, at around RM 777.6 million.
How healthy is Eco World International Berhad’s track record?
We can see from the most recent balance sheet that Eco World International Berhad had a liability of RM 529.3 million maturing within one year and a liability of RM 584.4 million beyond. On the other hand, he had a cash position of RM 291.7 million and RM 10.3 million of receivables due within one year. Thus, its liabilities total RM811.7 million more than the combination of its cash and short-term receivables.
This is a mountain of leverage compared to its market cap of RM 1.14 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Eco World International Berhad shareholders are faced with the double whammy of a high net debt / EBITDA ratio (19.2) and relatively low interest coverage, since EBIT is only 0.92 times the interest charges. This means that we would consider him to be in heavy debt. However, it should be heartwarming for shareholders to remember that Eco World International Berhad has actually increased its EBIT by 239% over the past 12 months. If this earnings trend continues, its debt load will be much more manageable in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Eco World International Berhad’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Fortunately for all shareholders, Eco World International Berhad has actually generated more free cash flow than EBIT over the past two years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
We were not impressed with Eco World International Berhad’s net debt versus EBITDA and its interest coverage made us cautious. But like a ballerina finishing on a perfect spin, she has no trouble converting her EBIT into free cash flow. When we consider all of the factors mentioned above, we feel a little cautious about Eco World International Berhad’s use of debt. While debt has its advantage in terms of potential higher returns, we believe shareholders should definitely consider how leverage levels might make the stock riskier. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 5 warning signs for Eco World International Berhad you need to be aware of it, and one of them is a bit of a concern.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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