E.A. Technique (M) Berhad (KLSE:EATECH) Has Debt But No Earnings; Should You Worry?

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. As with many other companies E.A. Technique (M) Berhad (KLSE:EATECH) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for E.A. Technique (M) Berhad

What Is E.A. Technique (M) Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that E.A. Technique (M) Berhad had debt of RM260.4m at the end of September 2020, a reduction from RM336.0m over a year. However, it does have RM16.1m in cash offsetting this, leading to net debt of about RM244.3m.

How Strong Is E.A. Technique (M) Berhad's Balance Sheet?

We can see from the most recent balance sheet that E.A. Technique (M) Berhad had liabilities of RM434.6m falling due within a year, and liabilities of RM135.0m due beyond that. On the other hand, it had cash of RM16.1m and RM38.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM514.9m.

This deficit casts a shadow over the RM132.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, E.A. Technique (M) Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine E.A. Technique (M) Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year E.A. Technique (M) Berhad had a loss before interest and tax, and actually shrunk its revenue by 25%, to RM317m. That makes us nervous, to say the least.

Caveat Emptor

While E.A. Technique (M) Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM33m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of RM54m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with E.A. Technique (M) Berhad .

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. 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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