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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Eversafe Rubber Berhad (KLSE:ESAFE) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Eversafe Rubber Berhad's Debt?

The image below, which you can click on for greater detail, shows that at March 2025 Eversafe Rubber Berhad had debt of RM48.7m, up from RM39.3m in one year. However, it also had RM23.2m in cash, and so its net debt is RM25.5m.

How Healthy Is Eversafe Rubber Berhad's Balance Sheet?

We can see from the most recent balance sheet that Eversafe Rubber Berhad had liabilities of RM43.0m falling due within a year, and liabilities of RM22.1m due beyond that. Offsetting these obligations, it had cash of RM23.2m as well as receivables valued at RM33.8m due within 12 months. So its liabilities total RM7.98m more than the combination of its cash and short-term receivables.

Eversafe Rubber Berhad has a market capitalization of RM36.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Eversafe Rubber Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

View our latest analysis for Eversafe Rubber Berhad

Over 12 months, Eversafe Rubber Berhad made a loss at the EBIT level, and saw its revenue drop to RM92m, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Eversafe Rubber Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM5.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 RM3.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Eversafe Rubber Berhad has 3 warning signs we think you should be aware of.

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.