Would Eversafe Rubber Berhad (KLSE:ESAFE) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Eversafe Rubber Berhad (KLSE:ESAFE) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Eversafe Rubber Berhad

What Is Eversafe Rubber Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Eversafe Rubber Berhad had RM41.7m in debt in December 2024; about the same as the year before. However, it also had RM19.7m in cash, and so its net debt is RM22.0m.

How Strong Is Eversafe Rubber Berhad's Balance Sheet?

According to the last reported balance sheet, Eversafe Rubber Berhad had liabilities of RM45.3m due within 12 months, and liabilities of RM13.6m due beyond 12 months. Offsetting these obligations, it had cash of RM19.7m as well as receivables valued at RM30.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM9.02m.

While this might seem like a lot, it is not so bad since Eversafe Rubber Berhad has a market capitalization of RM31.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Eversafe Rubber Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Eversafe Rubber Berhad had a loss before interest and tax, and actually shrunk its revenue by 16%, to RM98m. We would much prefer see growth.

Caveat Emptor

While Eversafe Rubber Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM3.7m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM2.7m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Eversafe Rubber Berhad is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.