Is Ewein Berhad (KLSE:EWEIN) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Ewein Berhad (KLSE:EWEIN) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ewein Berhad

What Is Ewein Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Ewein Berhad had RM46.9m of debt, an increase on RM16.2m, over one year. But it also has RM65.3m in cash to offset that, meaning it has RM18.4m net cash.

How Healthy Is Ewein Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ewein Berhad had liabilities of RM25.8m due within 12 months and liabilities of RM47.1m due beyond that. On the other hand, it had cash of RM65.3m and RM21.5m worth of receivables due within a year. So it actually has RM14.0m more liquid assets than total liabilities.

This surplus suggests that Ewein Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ewein Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Ewein Berhad is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 112% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ewein Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ewein Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Ewein Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ewein Berhad has net cash of RM18.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 519% of that EBIT to free cash flow, bringing in RM25m. So is Ewein Berhad's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for Ewein Berhad (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.