Stock Analysis

Is Eonmetall Group Berhad (KLSE:EMETALL) A Risky Investment?

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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.' 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 Eonmetall Group Berhad (KLSE:EMETALL) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Eonmetall Group Berhad

What Is Eonmetall Group Berhad's Debt?

As you can see below, Eonmetall Group Berhad had RM169.8m of debt at September 2023, down from RM194.5m a year prior. However, it does have RM17.0m in cash offsetting this, leading to net debt of about RM152.8m.

KLSE:EMETALL Debt to Equity History March 1st 2024

How Strong Is Eonmetall Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Eonmetall Group Berhad had liabilities of RM163.9m falling due within a year, and liabilities of RM39.3m due beyond that. Offsetting this, it had RM17.0m in cash and RM83.7m in receivables that were due within 12 months. So it has liabilities totalling RM102.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM112.2m, so it does suggest shareholders should keep an eye on Eonmetall Group Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Eonmetall Group Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Eonmetall Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 42%, to RM170m. To be frank that doesn't bode well.

Caveat Emptor

While Eonmetall Group 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 RM19m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM3.7m of cash over the last year. So to be blunt we think it is risky. 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. Be aware that Eonmetall Group Berhad is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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Find out whether Eonmetall Group Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.