Here's Why Euro Holdings Berhad (KLSE:EURO) Can Afford Some Debt

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.' 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. Importantly, Euro Holdings Berhad (KLSE:EURO) does carry debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Euro Holdings Berhad

What Is Euro Holdings Berhad's Net Debt?

As you can see below, at the end of December 2021, Euro Holdings Berhad had RM40.7m of debt, up from RM30.9m a year ago. Click the image for more detail. However, it also had RM8.72m in cash, and so its net debt is RM31.9m.

How Strong Is Euro Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Euro Holdings Berhad had liabilities of RM57.2m falling due within a year, and liabilities of RM9.22m due beyond that. Offsetting these obligations, it had cash of RM8.72m as well as receivables valued at RM20.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM37.4m.

Of course, Euro Holdings Berhad has a market capitalization of RM280.7m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Euro Holdings 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, Euro Holdings Berhad reported revenue of RM80m, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Euro Holdings Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM19m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM9.6m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Euro Holdings Berhad you should be aware of, and 2 of them are concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.