These 4 Measures Indicate That Ecomate Holdings Berhad (KLSE:ECOMATE) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Ecomate Holdings Berhad (KLSE:ECOMATE) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Ecomate Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that Ecomate Holdings Berhad had debt of RM13.0m at the end of February 2025, a reduction from RM13.8m over a year. However, it does have RM18.7m in cash offsetting this, leading to net cash of RM5.67m.

How Strong Is Ecomate Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Ecomate Holdings Berhad had liabilities of RM12.5m due within 12 months, and liabilities of RM11.4m due beyond 12 months. On the other hand, it had cash of RM18.7m and RM7.58m worth of receivables due within a year. So it actually has RM2.41m more liquid assets than total liabilities.

Having regard to Ecomate 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 RM504.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Ecomate Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Ecomate Holdings Berhad

Shareholders should be aware that Ecomate Holdings Berhad's EBIT was down 37% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ecomate Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ecomate Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Ecomate Holdings Berhad recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ecomate Holdings Berhad has net cash of RM5.67m, as well as more liquid assets than liabilities. So we don't have any problem with Ecomate Holdings Berhad's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Ecomate Holdings Berhad .

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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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.