Is Eduspec Holdings Berhad (KLSE:EDUSPEC) A Risky Investment?

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. We can see that Eduspec Holdings Berhad (KLSE:EDUSPEC) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Eduspec Holdings Berhad

What Is Eduspec Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Eduspec Holdings Berhad had debt of RM24.6m at the end of February 2022, a reduction from RM26.6m over a year. However, it also had RM3.35m in cash, and so its net debt is RM21.3m.

How Healthy Is Eduspec Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Eduspec Holdings Berhad had liabilities of RM38.8m falling due within a year, and liabilities of RM15.8m due beyond that. On the other hand, it had cash of RM3.35m and RM27.4m worth of receivables due within a year. So it has liabilities totalling RM23.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Eduspec Holdings Berhad has a market capitalization of RM60.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Eduspec Holdings Berhad 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.

In the last year Eduspec Holdings Berhad's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Eduspec Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM13m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM15m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Eduspec Holdings Berhad (including 2 which can't be ignored) .

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.

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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.