Esthetics International Group Berhad (KLSE:EIG) Seems To Use Debt Quite Sensibly

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. As with many other companies Esthetics International Group Berhad (KLSE:EIG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Esthetics International Group Berhad

What Is Esthetics International Group Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Esthetics International Group Berhad had RM20.9m of debt in March 2021, down from RM22.0m, one year before. However, it does have RM61.5m in cash offsetting this, leading to net cash of RM40.6m.

How Healthy Is Esthetics International Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Esthetics International Group Berhad had liabilities of RM63.6m falling due within a year, and liabilities of RM28.7m due beyond that. On the other hand, it had cash of RM61.5m and RM18.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM12.1m.

Since publicly traded Esthetics International Group Berhad shares are worth a total of RM119.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Esthetics International Group Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Esthetics International Group Berhad's load is not too heavy, because its EBIT was down 70% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Esthetics International Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Esthetics International Group Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Esthetics International Group Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Esthetics International Group Berhad does have more liabilities than liquid assets, it also has net cash of RM40.6m. And it impressed us with free cash flow of RM23m, being 281% of its EBIT. So we are not troubled with Esthetics International Group Berhad's debt use. 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. For instance, we've identified 4 warning signs for Esthetics International Group Berhad (1 makes us a bit uncomfortable) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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