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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. ‘ 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. We note that Eastland Equity Bhd. (KLSE: EASTLND) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. 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 think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Eastland Equity Bhd
What is the debt of Eastland Equity Bhd?
The chart below, which you can click for more details, shows Eastland Equity Bhd owed RM 57.8 million in debt as of June 2021; about the same as the year before. However, he has RM 2.11 million in cash offsetting this, which leads to a net debt of around RM 55.7 million.
How healthy is Eastland Equity Bhd’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Eastland Equity Bhd had liabilities of RM 49.8 million due within 12 months and RM 50.0 million liabilities due beyond. In return, he had RM2.11 million in cash and RM2.60 million in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by RM 95.2 million.
The lack here weighs heavily on the RM44.3million company itself, as if a child struggles under the weight of a huge backpack full of books, his gym gear, and a trumpet. So we would be watching its record closely, without a doubt. Ultimately, Eastland Equity Bhd would likely need a major recapitalization if its creditors demanded repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the earnings of Eastland Equity Bhd that will influence the performance of the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Last year Eastland Equity Bhd was not profitable on EBIT level, but managed to increase its turnover by 5.7%, to RM14 million. We generally like to see unprofitable businesses growing faster, but each in their own way.
Emptor Warning
Over the past twelve months, Eastland Equity Bhd has recorded a loss of profit before interest and taxes (EBIT). Indeed, he lost a very considerable RM68m in EBIT. When we look at this alongside the material liabilities, we’re not particularly confident in the business. It would have to improve its operation quickly for us to take an interest in it. It is fair to say that the loss of RM 66 million did not encourage us either; we would like to see a profit. In the meantime, we consider the title to be risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 5 warning signs for Eastland Equity Bhd (1 shouldn’t be ignored!) Which you should be aware of before investing here.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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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