Is Esthetics International Group Berhad (KLSE:EIG) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Esthetics International Group Berhad (KLSE:EIG) makes use of debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, 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 RM20.9m of debt at December 2020, down from RM22.1m a year prior. However, its balance sheet shows it holds RM62.5m in cash, so it actually has RM41.6m net cash.

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

According to the last reported balance sheet, Esthetics International Group Berhad had liabilities of RM63.0m due within 12 months, and liabilities of RM30.9m due beyond 12 months. On the other hand, it had cash of RM62.5m and RM17.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM13.5m.

Since publicly traded Esthetics International Group Berhad shares are worth a total of RM104.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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! There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Esthetics International Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 23%, to RM134m. To be frank that doesn't bode well.

So How Risky Is Esthetics International Group Berhad?

Although Esthetics International Group Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM550k. So taking that on face value, and considering the cash, we don't think its very 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Esthetics International Group Berhad you should be aware of, and 1 of them is a bit concerning.

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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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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