These 4 Measures Indicate That Esthetics International Group Berhad (KLSE:EIG) Is Using Debt Reasonably Well

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. Importantly, Esthetics International Group Berhad (KLSE:EIG) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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 RM19.4m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has RM32.4m in cash, leading to a RM13.0m net cash position.

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 RM84.7m due within 12 months and liabilities of RM30.4m due beyond that. On the other hand, it had cash of RM32.4m and RM24.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM58.4m.

This is a mountain of leverage relative to its market capitalization of RM74.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

It was also good to see that despite losing money on the EBIT line last year, Esthetics International Group Berhad turned things around in the last 12 months, delivering and EBIT of RM563k. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Esthetics International Group Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Esthetics International Group Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Esthetics International Group Berhad actually produced more free cash flow than EBIT. 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 RM13.0m. And it impressed us with free cash flow of RM12m, being 2,126% of its EBIT. So we don't have any problem with Esthetics International Group Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Esthetics International Group Berhad is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.

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