Econpile Holdings Berhad (KLSE:ECONBHD) Is Making Moderate Use Of 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.' 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. We can see that Econpile Holdings Berhad (KLSE:ECONBHD) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Econpile Holdings Berhad

How Much Debt Does Econpile Holdings Berhad Carry?

As you can see below, at the end of December 2020, Econpile Holdings Berhad had RM83.3m of debt, up from RM63.3m a year ago. Click the image for more detail. However, it does have RM57.5m in cash offsetting this, leading to net debt of about RM25.8m.

How Healthy Is Econpile Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Econpile Holdings Berhad had liabilities of RM244.0m due within 12 months, and liabilities of RM9.88m due beyond 12 months. Offsetting these obligations, it had cash of RM57.5m as well as receivables valued at RM568.0m due within 12 months. So it actually has RM371.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that Econpile Holdings Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Econpile Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Econpile Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM327m, which is a fall of 44%. To be frank that doesn't bode well.

Caveat Emptor

While Econpile Holdings 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. To be specific the EBIT loss came in at RM2.6m. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Econpile Holdings 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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