Here's Why Econpile Holdings Berhad (KLSE:ECONBHD) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Econpile Holdings Berhad (KLSE:ECONBHD) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 at June 2024 Econpile Holdings Berhad had debt of RM136.3m, up from RM110.1m in one year. However, because it has a cash reserve of RM78.4m, its net debt is less, at about RM57.9m.

How Strong Is Econpile Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Econpile Holdings Berhad had liabilities of RM278.0m due within a year, and liabilities of RM24.4m falling due after that. Offsetting this, it had RM78.4m in cash and RM535.2m in receivables that were due within 12 months. So it actually has RM311.2m 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. 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 11%, to RM418m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Econpile Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM15m. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Econpile Holdings Berhad that 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.