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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Eastland Equity Bhd. (KLSE:EASTLND) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Eastland Equity Bhd

What Is Eastland Equity Bhd's Debt?

The chart below, which you can click on for greater detail, shows that Eastland Equity Bhd had RM57.8m in debt in June 2021; about the same as the year before. However, it does have RM2.11m in cash offsetting this, leading to net debt of about RM55.7m.

How Healthy 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 RM49.8m due within 12 months and liabilities of RM50.0m due beyond that. Offsetting this, it had RM2.11m in cash and RM2.60m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM95.2m.

The deficiency here weighs heavily on the RM44.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Eastland Equity Bhd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Eastland Equity Bhd'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.

In the last year Eastland Equity Bhd wasn't profitable at an EBIT level, but managed to grow its revenue by 5.7%, to RM14m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Eastland Equity Bhd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM68m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM66m didn't encourage us either; we'd like to see a profit. In the meantime, we 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. For example, we've discovered 5 warning signs for Eastland Equity Bhd (1 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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