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

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that ECA Integrated Solution Berhad (KLSE:ECA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 April 2024, ECA Integrated Solution Berhad had RM10.2m of debt, up from RM4.99m a year ago. Click the image for more detail. However, it does have RM29.3m in cash offsetting this, leading to net cash of RM19.1m.

How Healthy Is ECA Integrated Solution Berhad's Balance Sheet?

The latest balance sheet data shows that ECA Integrated Solution Berhad had liabilities of RM8.08m due within a year, and liabilities of RM6.07m falling due after that. Offsetting these obligations, it had cash of RM29.3m as well as receivables valued at RM26.5m due within 12 months. So it actually has RM41.6m more liquid assets than total liabilities.

This excess liquidity suggests that ECA Integrated Solution Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues 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.

It is just as well that ECA Integrated Solution Berhad's load is not too heavy, because its EBIT was down 69% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ECA Integrated Solution Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, ECA Integrated Solution Berhad recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case ECA Integrated Solution Berhad has RM19.1m in net cash and a decent-looking balance sheet. So we don't have any problem with ECA Integrated Solution Berhad's use of debt. 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 ECA Integrated Solution Berhad is showing 3 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.