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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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

How Much Debt Does Esthetics International Group Berhad Carry?

As you can see below, Esthetics International Group Berhad had RM20.2m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM43.4m in cash, so it actually has RM23.3m net cash.

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

Zooming in on the latest balance sheet data, we can see that Esthetics International Group Berhad had liabilities of RM68.0m due within 12 months and liabilities of RM21.8m due beyond that. On the other hand, it had cash of RM43.4m and RM20.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM25.9m.

Esthetics International Group Berhad has a market capitalization of RM85.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

Although Esthetics International Group Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM2.2m in EBIT over the last twelve months. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 year. 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 RM23.3m. The cherry on top was that in converted 605% of that EBIT to free cash flow, bringing in RM13m. So we don't have any problem with Esthetics International Group Berhad's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Esthetics International Group Berhad has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.