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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 is this debt a concern to shareholders?

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. 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. 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

How Much Debt Does Esthetics International Group Berhad Carry?

The chart below, which you can click on for greater detail, shows that Esthetics International Group Berhad had RM19.8m in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds RM37.9m in cash, so it actually has RM18.1m net cash.

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

According to the last reported balance sheet, Esthetics International Group Berhad had liabilities of RM62.1m due within 12 months, and liabilities of RM24.2m due beyond 12 months. Offsetting this, it had RM37.9m in cash and RM22.5m in receivables that were due within 12 months. So it has liabilities totalling RM25.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Esthetics International Group Berhad is worth RM81.8m, and thus could probably raise enough capital to shore up 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. 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to RM156m. With any luck the company will be able to grow its way to profitability.

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 generated positive free cash flow of RM3.6m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Esthetics International Group Berhad shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. 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 instance, we've identified 2 warning signs for Esthetics International Group Berhad (1 doesn't sit too well with us) you should be aware of.

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. 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.