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

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. 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.

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that E.A. Technique (M) Berhad had RM260.6m of debt in June 2021, down from RM285.4m, one year before. However, it does have RM27.5m in cash offsetting this, leading to net debt of about RM233.1m.

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

Zooming in on the latest balance sheet data, we can see that E.A. Technique (M) Berhad had liabilities of RM431.1m due within 12 months and liabilities of RM152.9m due beyond that. On the other hand, it had cash of RM27.5m and RM32.1m worth of receivables due within a year. So it has liabilities totalling RM524.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM74.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if E.A. Technique (M) Berhad can strengthen its balance sheet over time. 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 RM207m, which is a fall of 36%. That makes us nervous, to say the least.

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). Its EBIT loss was a whopping RM47m. 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. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through RM1.1m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - E.A. Technique (M) Berhad has 2 warning signs we think you should be aware of.

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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