Is Econpile Holdings Berhad (KLSE:ECONBHD) Using Too Much 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.' 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. As with many other companies Econpile Holdings Berhad (KLSE:ECONBHD) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Econpile Holdings Berhad

How Much Debt Does Econpile Holdings Berhad Carry?

The chart below, which you can click on for greater detail, shows that Econpile Holdings Berhad had RM101.8m in debt in December 2022; about the same as the year before. However, it does have RM37.9m in cash offsetting this, leading to net debt of about RM63.9m.

How Healthy Is Econpile Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Econpile Holdings Berhad had liabilities of RM216.4m due within a year, and liabilities of RM29.7m falling due after that. On the other hand, it had cash of RM37.9m and RM557.4m worth of receivables due within a year. So it actually has RM349.3m more liquid assets than total liabilities.

This surplus strongly suggests that Econpile Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. There's no doubt that we learn most about debt from the balance sheet. 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 RM361m, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

Not only did Econpile Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM21m. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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 - Econpile Holdings Berhad has 2 warning signs we think you should be aware of.

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.