ENRA Group Berhad (KLSE:ENRA) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, ENRA Group Berhad (KLSE:ENRA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ENRA Group Berhad

What Is ENRA Group Berhad's Debt?

As you can see below, ENRA Group Berhad had RM28.2m of debt at December 2021, down from RM73.3m a year prior. However, its balance sheet shows it holds RM31.1m in cash, so it actually has RM2.84m net cash.

How Strong Is ENRA Group Berhad's Balance Sheet?

According to the last reported balance sheet, ENRA Group Berhad had liabilities of RM51.6m due within 12 months, and liabilities of RM31.4m due beyond 12 months. Offsetting this, it had RM31.1m in cash and RM18.7m in receivables that were due within 12 months. So its liabilities total RM33.3m more than the combination of its cash and short-term receivables.

ENRA Group Berhad has a market capitalization of RM101.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, ENRA Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that ENRA Group Berhad grew its EBIT by 1,767% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ENRA Group 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. ENRA Group 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. Happily for any shareholders, ENRA Group Berhad actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While ENRA Group Berhad does have more liabilities than liquid assets, it also has net cash of RM2.84m. The cherry on top was that in converted 361% of that EBIT to free cash flow, bringing in RM27m. So we don't think ENRA Group Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for ENRA Group Berhad that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.