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. We can see that Eduspec Holdings Berhad (KLSE:EDUSPEC) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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?

The chart below, which you can click on for greater detail, shows that Eduspec Holdings Berhad had RM25.1m in debt in May 2022; about the same as the year before. However, it also had RM1.97m in cash, and so its net debt is RM23.1m.

How Strong 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 RM45.4m due within 12 months and liabilities of RM9.94m due beyond that. Offsetting these obligations, it had cash of RM1.97m as well as receivables valued at RM27.6m due within 12 months. So its liabilities total RM25.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Eduspec Holdings Berhad is worth RM45.7m, 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 it is Eduspec Holdings Berhad'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.

Over 12 months, Eduspec Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM8.9m, which is a fall of 4.2%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Eduspec Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM11m 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. Another cause for caution is that is bled RM3.7m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. We've identified 5 warning signs with Eduspec Holdings Berhad (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.