Eksons Corporation Berhad (KLSE:EKSONS) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Eksons Corporation Berhad (KLSE:EKSONS) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Eksons Corporation Berhad

What Is Eksons Corporation Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Eksons Corporation Berhad had RM17.4m of debt, an increase on RM15.8m, over one year. However, its balance sheet shows it holds RM201.4m in cash, so it actually has RM184.0m net cash.

How Strong Is Eksons Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, Eksons Corporation Berhad had liabilities of RM23.7m due within 12 months, and liabilities of RM21.2m due beyond 12 months. Offsetting these obligations, it had cash of RM201.4m as well as receivables valued at RM4.53m due within 12 months. So it can boast RM161.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Eksons Corporation Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Eksons Corporation Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Eksons Corporation Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Eksons Corporation Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 162%, to RM48m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Eksons Corporation Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Eksons Corporation Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM2.0m and booked a RM36m accounting loss. But the saving grace is the RM184.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, Eksons Corporation Berhad's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. To that end, you should learn about the 2 warning signs we've spotted with Eksons Corporation Berhad (including 1 which is shouldn't be ignored) .

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. 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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