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 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. We can see that Eversendai Corporation Berhad (KLSE:SENDAI) does use debt in its business. But is this debt a concern to shareholders?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Eversendai Corporation Berhad

What Is Eversendai Corporation Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Eversendai Corporation Berhad had debt of RM1.08b at the end of December 2021, a reduction from RM1.18b over a year. On the flip side, it has RM102.9m in cash leading to net debt of about RM979.8m.

How Strong Is Eversendai Corporation Berhad's Balance Sheet?

The latest balance sheet data shows that Eversendai Corporation Berhad had liabilities of RM1.98b due within a year, and liabilities of RM211.0m falling due after that. On the other hand, it had cash of RM102.9m and RM1.73b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM358.3m.

This deficit casts a shadow over the RM148.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Eversendai Corporation Berhad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of RM1.2b, which is a gain of 8.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Eversendai Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM100m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM134m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Eversendai Corporation Berhad has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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. 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.