Would Euro Holdings Berhad (KLSE:EURO) Be Better Off With Less 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.' 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. As with many other companies Euro Holdings Berhad (KLSE:EURO) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for Euro Holdings Berhad

What Is Euro Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Euro Holdings Berhad had debt of RM33.4m at the end of September 2020, a reduction from RM43.6m over a year. However, it does have RM3.69m in cash offsetting this, leading to net debt of about RM29.7m.

How Healthy Is Euro Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Euro Holdings Berhad had liabilities of RM65.8m due within a year, and liabilities of RM10.1m falling due after that. Offsetting this, it had RM3.69m in cash and RM41.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM31.1m.

Having regard to Euro Holdings Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM3.40b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Euro Holdings Berhad has a very light debt load indeed. 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 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.

Over 12 months, Euro Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM68m, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

While Euro Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM5.9m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of RM8.4m. So to be blunt we do think it is 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 2 warning signs for Euro Holdings Berhad you should be aware of, and 1 of them is concerning.

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.

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