Is EITA Resources Berhad (KLSE:EITA) A Risky Investment?

Warren Buffett famously said, '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, EITA Resources Berhad (KLSE:EITA) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 EITA Resources Berhad

What Is EITA Resources Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that EITA Resources Berhad had debt of RM35.4m at the end of March 2021, a reduction from RM42.9m over a year. But it also has RM58.1m in cash to offset that, meaning it has RM22.7m net cash.

A Look At EITA Resources Berhad's Liabilities

The latest balance sheet data shows that EITA Resources Berhad had liabilities of RM87.9m due within a year, and liabilities of RM20.0m falling due after that. Offsetting these obligations, it had cash of RM58.1m as well as receivables valued at RM137.7m due within 12 months. So it can boast RM87.9m more liquid assets than total liabilities.

This surplus liquidity suggests that EITA Resources Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, EITA Resources Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that EITA Resources Berhad's load is not too heavy, because its EBIT was down 42% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 EITA Resources 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. EITA Resources 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, EITA Resources Berhad reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case EITA Resources Berhad has RM22.7m in net cash and a decent-looking balance sheet. So we are not troubled with EITA Resources Berhad's debt use. 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 example - EITA Resources Berhad has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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