Is Eversendai Corporation Berhad (KLSE:SENDAI) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Eversendai Corporation Berhad (KLSE:SENDAI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Eversendai Corporation Berhad

What Is Eversendai Corporation Berhad's Debt?

The image below, which you can click on for greater detail, shows that Eversendai Corporation Berhad had debt of RM1.05b at the end of March 2022, a reduction from RM1.22b over a year. However, it also had RM88.1m in cash, and so its net debt is RM965.8m.

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 RM1.80b falling due within a year, and liabilities of RM300.1m due beyond that. On the other hand, it had cash of RM88.1m and RM1.65b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM363.9m.

The deficiency here weighs heavily on the RM97.6m 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 definitely think shareholders need to watch this one closely. After all, Eversendai Corporation Berhad would likely require a major re-capitalisation if it had to pay its creditors today. 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.

In the last year Eversendai Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 5.2%, to RM1.1b. That's not what we would hope to see.

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 RM71m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost RM162m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Eversendai Corporation Berhad is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.