Is EP Manufacturing Bhd (KLSE:EPMB) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, EP Manufacturing Bhd (KLSE:EPMB) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for EP Manufacturing Bhd

How Much Debt Does EP Manufacturing Bhd Carry?

The chart below, which you can click on for greater detail, shows that EP Manufacturing Bhd had RM186.2m in debt in September 2021; about the same as the year before. On the flip side, it has RM37.3m in cash leading to net debt of about RM148.9m.

How Strong Is EP Manufacturing Bhd's Balance Sheet?

We can see from the most recent balance sheet that EP Manufacturing Bhd had liabilities of RM230.2m falling due within a year, and liabilities of RM34.9m due beyond that. Offsetting this, it had RM37.3m in cash and RM49.3m in receivables that were due within 12 months. So it has liabilities totalling RM178.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM264.7m, so it does suggest shareholders should keep an eye on EP Manufacturing Bhd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since EP Manufacturing Bhd 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.

Over 12 months, EP Manufacturing Bhd made a loss at the EBIT level, and saw its revenue drop to RM353m, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

Not only did EP Manufacturing Bhd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM2.5m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM125k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with EP Manufacturing Bhd .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.