Is Eco World International Berhad (KLSE:EWINT) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Eco World International Berhad (KLSE:EWINT) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Eco World International Berhad

How Much Debt Does Eco World International Berhad Carry?

The image below, which you can click on for greater detail, shows that Eco World International Berhad had debt of RM463.8m at the end of January 2023, a reduction from RM780.5m over a year. However, it does have RM910.0m in cash offsetting this, leading to net cash of RM446.3m.

How Strong Is Eco World International Berhad's Balance Sheet?

According to the last reported balance sheet, Eco World International Berhad had liabilities of RM480.7m due within 12 months, and liabilities of RM1.31m due beyond 12 months. Offsetting this, it had RM910.0m in cash and RM21.3m in receivables that were due within 12 months. So it actually has RM449.3m more liquid assets than total liabilities.

This luscious liquidity implies that Eco World International Berhad's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Eco World International Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Eco World International 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, Eco World International Berhad made a loss at the EBIT level, and saw its revenue drop to RM133m, which is a fall of 58%. To be frank that doesn't bode well.

So How Risky Is Eco World International Berhad?

Although Eco World International Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM70m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Eco World International Berhad you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.