Eversendai Corporation Berhad (KLSE:SENDAI) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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. We note that Eversendai Corporation Berhad (KLSE:SENDAI) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Eversendai Corporation Berhad

How Much Debt Does Eversendai Corporation Berhad Carry?

The chart below, which you can click on for greater detail, shows that Eversendai Corporation Berhad had RM1.15b in debt in September 2020; about the same as the year before. However, it also had RM125.8m in cash, and so its net debt is RM1.02b.

How Healthy Is Eversendai Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that Eversendai Corporation Berhad had liabilities of RM1.39b falling due within a year, and liabilities of RM1.05b due beyond that. Offsetting these obligations, it had cash of RM125.8m as well as receivables valued at RM1.96b due within 12 months. So its liabilities total RM352.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM214.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Eversendai Corporation Berhad would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Eversendai Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Eversendai Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM1.0b, which is a fall of 38%. 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. Indeed, it lost RM16m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of RM80m. And until that time we think this is a risky stock. 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. Case in point: We've spotted 2 warning signs for Eversendai Corporation Berhad 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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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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