Econpile Holdings Berhad (KLSE:ECONBHD) Is Making Moderate Use Of 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 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 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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

What Is Econpile Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Econpile Holdings Berhad had debt of RM76.1m at the end of December 2021, a reduction from RM83.4m over a year. However, it does have RM45.5m in cash offsetting this, leading to net debt of about RM30.6m.

A Look At Econpile Holdings Berhad's Liabilities

The latest balance sheet data shows that Econpile Holdings Berhad had liabilities of RM220.3m due within a year, and liabilities of RM37.4m falling due after that. On the other hand, it had cash of RM45.5m and RM590.2m worth of receivables due within a year. So it actually has RM378.0m 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Econpile Holdings 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.

In the last year Econpile Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to RM406m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Econpile Holdings Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM3.7m at the EBIT level. 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. 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, we've discovered 2 warning signs for Econpile Holdings Berhad that you should be aware of before investing here.

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.