Eduspec Holdings Berhad (KLSE:EDUSPEC) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Eduspec Holdings Berhad (KLSE:EDUSPEC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Eduspec Holdings Berhad

What Is Eduspec Holdings Berhad's Net Debt?

As you can see below, Eduspec Holdings Berhad had RM35.6m of debt, at August 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of RM21.1m, its net debt is less, at about RM14.6m.

How Healthy Is Eduspec Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Eduspec Holdings Berhad had liabilities of RM45.7m due within 12 months, and liabilities of RM20.2m due beyond 12 months. Offsetting these obligations, it had cash of RM21.1m as well as receivables valued at RM24.1m due within 12 months. So it has liabilities totalling RM20.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Eduspec Holdings Berhad is worth RM48.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Eduspec 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.

In the last year Eduspec Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 65%, to RM10m. That makes us nervous, to say the least.

Caveat Emptor

While Eduspec 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. Indeed, it lost a very considerable RM57m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM21m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Eduspec Holdings Berhad is showing 5 warning signs in our investment analysis , and 3 of those can't be ignored...

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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