Is Esthetics International Group Berhad (KLSE:EIG) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Esthetics International Group Berhad (KLSE:EIG) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Esthetics International Group Berhad

What Is Esthetics International Group Berhad's Net Debt?

As you can see below, Esthetics International Group Berhad had RM19.8m of debt at March 2022, down from RM20.9m a year prior. However, it does have RM55.4m in cash offsetting this, leading to net cash of RM35.6m.

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

The latest balance sheet data shows that Esthetics International Group Berhad had liabilities of RM72.3m due within a year, and liabilities of RM25.6m falling due after that. Offsetting these obligations, it had cash of RM55.4m as well as receivables valued at RM12.8m due within 12 months. So it has liabilities totalling RM29.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Esthetics International Group Berhad has a market capitalization of RM85.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Esthetics International Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Esthetics International Group Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Esthetics International Group Berhad made a loss at the EBIT level, and saw its revenue drop to RM125m, which is a fall of 3.8%. That's not what we would hope to see.

So How Risky Is Esthetics International Group Berhad?

While Esthetics International Group Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM12m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example, we've discovered 3 warning signs for Esthetics International Group Berhad (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.