Does ECA Integrated Solution Berhad (KLSE:ECA) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 ECA Integrated Solution Berhad (KLSE:ECA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ECA Integrated Solution Berhad

How Much Debt Does ECA Integrated Solution Berhad Carry?

As you can see below, at the end of January 2024, ECA Integrated Solution Berhad had RM9.62m of debt, up from RM5.35m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM34.5m in cash, so it actually has RM24.9m net cash.

A Look At ECA Integrated Solution Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that ECA Integrated Solution Berhad had liabilities of RM7.12m due within 12 months and liabilities of RM6.31m due beyond that. Offsetting this, it had RM34.5m in cash and RM21.7m in receivables that were due within 12 months. So it can boast RM42.8m more liquid assets than total liabilities.

This surplus suggests that ECA Integrated Solution Berhad is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that ECA Integrated Solution Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact ECA Integrated Solution Berhad's saving grace is its low debt levels, because its EBIT has tanked 22% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ECA Integrated Solution Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ECA Integrated Solution Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, ECA Integrated Solution Berhad's free cash flow amounted to 20% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case ECA Integrated Solution Berhad has RM24.9m in net cash and a decent-looking balance sheet. So we are not troubled with ECA Integrated Solution Berhad's debt use. 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 - ECA Integrated Solution Berhad has 1 warning sign we think you should be aware of.

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.