Here's Why Ecoscience International Berhad (KLSE:EIB) Can Afford Some Debt

Warren Buffett famously said, '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 Ecoscience International Berhad (KLSE:EIB) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. 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. 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.

How Much Debt Does Ecoscience International Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Ecoscience International Berhad had RM63.7m of debt, an increase on RM55.7m, over one year. On the flip side, it has RM23.2m in cash leading to net debt of about RM40.5m.

A Look At Ecoscience International Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Ecoscience International Berhad had liabilities of RM91.5m due within 12 months and liabilities of RM10.1m due beyond that. On the other hand, it had cash of RM23.2m and RM93.3m worth of receivables due within a year. So it actually has RM14.9m more liquid assets than total liabilities.

It's good to see that Ecoscience International Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ecoscience International Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Ecoscience International Berhad

In the last year Ecoscience International Berhad had a loss before interest and tax, and actually shrunk its revenue by 6.9%, to RM145m. That's not what we would hope to see.

Caveat Emptor

Importantly, Ecoscience International Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM22m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Ecoscience International Berhad (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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.