Euro Holdings Berhad (KLSE:EURO) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Euro Holdings Berhad (KLSE:EURO) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Euro Holdings Berhad

How Much Debt Does Euro Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Euro Holdings Berhad had RM40.8m of debt, an increase on RM39.1m, over one year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Euro Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Euro Holdings Berhad had liabilities of RM60.2m due within 12 months and liabilities of RM6.50m due beyond that. Offsetting these obligations, it had cash of RM326.0k as well as receivables valued at RM23.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM42.6m.

While this might seem like a lot, it is not so bad since Euro Holdings Berhad has a market capitalization of RM97.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Euro Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Euro Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 172%, to RM170m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Euro Holdings Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping RM19m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM13m of cash over the last year. So suffice it to say we consider the stock very risky. 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 instance, we've identified 5 warning signs for Euro Holdings Berhad (2 are a bit unpleasant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.