Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. We can see that Eonmetall Group Berhad (KLSE:EMETALL) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Eonmetall Group Berhad’s Net Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Eonmetall Group Berhad had debt of RM144.9m, up from RM128 in one year. However, it also had RM14.4m in cash, and so its net debt is RM130.5m.
A Look At Eonmetall Group Berhad’s Liabilities
Zooming in on the latest balance sheet data, we can see that Eonmetall Group Berhad had liabilities of RM138.9m due within 12 months and liabilities of RM45.2m due beyond that. Offsetting this, it had RM14.4m in cash and RM84.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM85.6m.
When you consider that this deficiency exceeds the company’s RM77.8m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Eonmetall Group 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.
In the last year Eonmetall Group Berhad had negative earnings before interest and tax, and actually shrunk its revenue by 24%, to RM101m. That makes us nervous, to say the least.
Not only did Eonmetall Group Berhad’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM4.4m at the EBIT level. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. We’d want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM2.5m in negative free cash flow over the last year. That means it’s on the risky side of things. 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. Be aware that Eonmetall Group Berhad is showing 3 warning signs in our investment analysis , and 1 of those shouldn’t be ignored…
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.