Would Eduspec Holdings Berhad (KLSE:EDUSPEC) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Eduspec Holdings Berhad

What Is Eduspec Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Eduspec Holdings Berhad had RM26.6m of debt in February 2021, down from RM35.5m, one year before. However, it also had RM6.59m in cash, and so its net debt is RM20.0m.

How Healthy Is Eduspec Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eduspec Holdings Berhad had liabilities of RM36.6m due within 12 months and liabilities of RM20.7m due beyond that. Offsetting this, it had RM6.59m in cash and RM20.3m in receivables that were due within 12 months. So its liabilities total RM30.3m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM44.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 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 54%, to RM9.6m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Eduspec Holdings Berhad'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 RM25m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM961k of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Eduspec Holdings Berhad has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

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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