Does UEM Edgenta Berhad (KLSE:EDGENTA) Have A Healthy Balance Sheet?

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.' 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 UEM Edgenta Berhad (KLSE:EDGENTA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for UEM Edgenta Berhad

What Is UEM Edgenta Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that UEM Edgenta Berhad had RM488.4m of debt in March 2021, down from RM508.8m, one year before. But it also has RM575.0m in cash to offset that, meaning it has RM86.7m net cash.

How Strong Is UEM Edgenta Berhad's Balance Sheet?

The latest balance sheet data shows that UEM Edgenta Berhad had liabilities of RM854.6m due within a year, and liabilities of RM395.4m falling due after that. Offsetting these obligations, it had cash of RM575.0m as well as receivables valued at RM864.8m due within 12 months. So it can boast RM189.9m more liquid assets than total liabilities.

This surplus suggests that UEM Edgenta Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, UEM Edgenta Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for UEM Edgenta Berhad if management cannot prevent a repeat of the 98% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if UEM Edgenta Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. UEM Edgenta Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, UEM Edgenta Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case UEM Edgenta Berhad has RM86.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in RM192m. So we are not troubled with UEM Edgenta Berhad's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for UEM Edgenta Berhad you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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