Is E.A. Technique (M) Berhad (KLSE:EATECH) Using Debt Sensibly?

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.' 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 E.A. Technique (M) Berhad (KLSE:EATECH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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

How Much Debt Does E.A. Technique (M) Berhad Carry?

As you can see below, E.A. Technique (M) Berhad had RM269.3m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM28.9m in cash, and so its net debt is RM240.4m.

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 RM526.2m due within 12 months, and liabilities of RM3.10m due beyond 12 months. On the other hand, it had cash of RM28.9m and RM22.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM477.8m.

This deficit casts a shadow over the RM21.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, E.A. Technique (M) Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is E.A. Technique (M) Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year E.A. Technique (M) Berhad had a loss before interest and tax, and actually shrunk its revenue by 30%, to RM144m. 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. Its EBIT loss was a whopping RM4.7m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. 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 burned through RM9.3m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for E.A. Technique (M) Berhad you should know about.

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. 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.