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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Esthetics International Group Berhad (KLSE:EIG) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Esthetics International Group Berhad

What Is Esthetics International Group Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Esthetics International Group Berhad had RM20.1m in debt in June 2023; about the same as the year before. But on the other hand it also has RM29.0m in cash, leading to a RM8.87m net cash position.

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

According to the last reported balance sheet, Esthetics International Group Berhad had liabilities of RM73.2m due within 12 months, and liabilities of RM28.0m due beyond 12 months. On the other hand, it had cash of RM29.0m and RM23.6m worth of receivables due within a year. So its liabilities total RM48.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM78.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Esthetics International Group Berhad reported revenue of RM172m, which is a gain of 28%, although it did not report any earnings before interest and tax. 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 RM11m. 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. One positive is that Esthetics International Group Berhad is growing revenue apace, which makes it easier to sell a growth story and 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. However, not all investment risk resides within the balance sheet - far from it. For example Esthetics International Group Berhad has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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.