Is Eastland Equity Bhd (KLSE:EASTLND) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Eastland Equity Bhd. (KLSE:EASTLND) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Eastland Equity Bhd

How Much Debt Does Eastland Equity Bhd Carry?

As you can see below, Eastland Equity Bhd had RM59.6m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM2.18m in cash offsetting this, leading to net debt of about RM57.4m.

How Strong Is Eastland Equity Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eastland Equity Bhd had liabilities of RM70.1m due within 12 months and liabilities of RM38.9m due beyond that. Offsetting these obligations, it had cash of RM2.18m as well as receivables valued at RM2.73m due within 12 months. So its liabilities total RM104.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM45.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Eastland Equity Bhd 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 you can't view debt in total isolation; since Eastland Equity Bhd will need earnings to service that debt. 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, Eastland Equity Bhd made a loss at the EBIT level, and saw its revenue drop to RM13m, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Eastland Equity Bhd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM6.7m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of RM13m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Eastland Equity Bhd (1 is a bit concerning) 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. 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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