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

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. Importantly, Econpile Holdings Berhad (KLSE:ECONBHD) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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What Is Econpile Holdings Berhad's Net Debt?

As you can see below, at the end of June 2022, Econpile Holdings Berhad had RM110.9m of debt, up from RM77.8m a year ago. Click the image for more detail. However, because it has a cash reserve of RM52.9m, its net debt is less, at about RM58.0m.

A Look At Econpile Holdings Berhad's Liabilities

According to the last reported balance sheet, Econpile Holdings Berhad had liabilities of RM231.4m due within 12 months, and liabilities of RM33.4m due beyond 12 months. Offsetting these obligations, it had cash of RM52.9m as well as receivables valued at RM568.6m due within 12 months. So it can boast RM356.7m more liquid assets than total liabilities.

This luscious liquidity implies that Econpile Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Econpile Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 11%, to RM373m. We would much prefer see growth.

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. Indeed, it lost a very considerable RM34m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Econpile Holdings Berhad has 1 warning sign we think you should be aware of.

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.