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David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that EA Technical (M) Berhad (KLSE: EATECH) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for EA Technique (M) Berhad
What is the debt of EA Technique (M) Berhad?
You can click on the graph below for historical figures, but it shows EA Technique (M) Berhad owed RM 260.6 million in June 2021, up from RM 285.4 million a year earlier. However, he has RM27.5million in cash offsetting this, leading to a net debt of around RM233.1million.
How strong is EA Technique (M) Berhad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that EA Technique (M) Berhad had a liability of RM 431.1 million due within 12 months and a liability of RM 152.9 million due beyond. . On the other hand, he had a cash position of RM27.5 million and RM32.1 million of receivables due within one year. So he has a liability totaling RM 524.4 million more than his cash and short-term receivables combined.
The lack here weighs heavily on the RM 74.3million company itself, as if a child struggles under the weight of a huge backpack full of books, his gym gear, and a trumpet. We therefore believe that shareholders should watch it closely. After all, EA Technique (M) Berhad would likely need a major recapitalization if it were to pay its creditors today. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether EA Technique (M) Berhad can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over 12 months, EA Technique (M) Berhad recorded a loss in EBIT and saw its revenue drop to RM207 million, a decrease of 36%. It makes us nervous, to say the least.
Emptor Warning
Not only has EA Technique (M) Berhad’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). His loss of EBIT was a whopping RM47m. Thinking about this and the large total liabilities, it’s hard to know what to say about the stock due to our intense de-refinement for it. Like all long shots, we’re sure it has a brilliant presentation outlining its blue sky potential. But the reality is, he’s low on liquid assets compared to liabilities, and he’s burned 1.1 million RM in the past year. So we consider this to be a high risk stock, and we are concerned that its stock price will drop faster than a filthy one with a great white shark attacking it. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – EA Technique (M) Berhad a 2 warning signs we think you should be aware.
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 the mentioned stocks.
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