Does Eversendai Corporation Berhad (KLSE:SENDAI) 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.' 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 Eversendai Corporation Berhad (KLSE:SENDAI) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Eversendai Corporation Berhad

What Is Eversendai Corporation Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Eversendai Corporation Berhad had RM1.14b in debt in December 2020; about the same as the year before. However, it also had RM137.4m in cash, and so its net debt is RM1.00b.

A Look At Eversendai Corporation Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Eversendai Corporation Berhad had liabilities of RM1.78b due within 12 months and liabilities of RM763.0m due beyond that. Offsetting this, it had RM137.4m in cash and RM2.06b in receivables that were due within 12 months. So its liabilities total RM351.2m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM222.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Eversendai Corporation Berhad would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Eversendai Corporation Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Eversendai Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM1.1b, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

While Eversendai Corporation Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM62m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of RM126m. In the meantime, we consider the stock to be risky. 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. For instance, we've identified 1 warning sign for Eversendai Corporation 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. 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.
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