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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, E.A. Technique (M) Berhad (KLSE:EATECH) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 RM220.4m at the end of March 2021, a reduction from RM312.8m over a year. And it doesn't have much cash, so its net debt is about the same.

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

According to the last reported balance sheet, E.A. Technique (M) Berhad had liabilities of RM470.2m due within 12 months, and liabilities of RM97.2m due beyond 12 months. On the other hand, it had cash of RM4.05m and RM23.6m worth of receivables due within a year. So it has liabilities totalling RM539.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM61.0m 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, E.A. Technique (M) Berhad made a loss at the EBIT level, and saw its revenue drop to RM246m, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did E.A. Technique (M) Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM57m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost RM146m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. We've identified 2 warning signs with E.A. Technique (M) Berhad , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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