Is Eastland Equity Bhd (KLSE:EASTLND) Weighed On By Its Debt Load?

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. We can see that Eastland Equity Bhd. (KLSE:EASTLND) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Eastland Equity Bhd

How Much Debt Does Eastland Equity Bhd Carry?

As you can see below, Eastland Equity Bhd had RM60.9m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM2.14m in cash, and so its net debt is RM58.8m.

A Look At Eastland Equity Bhd's Liabilities

We can see from the most recent balance sheet that Eastland Equity Bhd had liabilities of RM50.3m falling due within a year, and liabilities of RM59.0m due beyond that. Offsetting this, it had RM2.14m in cash and RM2.72m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM104.4m.

The deficiency here weighs heavily on the RM47.0m 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 definitely think shareholders need to watch this one closely. After all, Eastland Equity Bhd would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. 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 29%. To be frank that doesn't bode well.

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). Its EBIT loss was a whopping RM7.3m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of RM11m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Eastland Equity Bhd (1 is potentially serious) 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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