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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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 A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Eversendai Corporation Berhad

How Much Debt Does Eversendai Corporation Berhad Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Eversendai Corporation Berhad had debt of RM1.11b, up from RM1.06b in one year. However, it does have RM107.4m in cash offsetting this, leading to net debt of about RM1.00b.

How Strong Is Eversendai Corporation Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eversendai Corporation Berhad had liabilities of RM2.24b due within 12 months and liabilities of RM291.5m due beyond that. On the other hand, it had cash of RM107.4m and RM1.72b worth of receivables due within a year. So it has liabilities totalling RM704.0m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM144.5m 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. 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 it is Eversendai Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. 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 RM1.1b, which is a gain of 6.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Eversendai Corporation Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM18m at the EBIT level. 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. But we think that is unlikely, given it is low on liquid assets, and burned through RM4.9m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For example, we've discovered 3 warning signs for Eversendai Corporation Berhad (2 don't sit too well with us!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.