Is Eversendai Corporation Berhad (KLSE:SENDAI) Using Debt In A Risky Way?

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 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does Eversendai Corporation Berhad Carry?

As you can see below, Eversendai Corporation Berhad had RM1.17b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM81.9m in cash offsetting this, leading to net debt of about RM1.09b.

How Healthy Is Eversendai Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, Eversendai Corporation Berhad had liabilities of RM1.86b due within 12 months, and liabilities of RM772.3m due beyond 12 months. Offsetting these obligations, it had cash of RM81.9m as well as receivables valued at RM2.25b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM297.3m.

This deficit casts a shadow over the RM132.8m company, like a colossus towering over mere mortals. 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. 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 RM1.3b, which is a gain of 7.1%, 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

Importantly, Eversendai Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM30m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM4.8m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Eversendai Corporation Berhad you should know about.

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.

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.

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