Is ENRA Group Berhad (KLSE:ENRA) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that ENRA Group Berhad (KLSE:ENRA) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that ENRA is potentially overvalued!

How Much Debt Does ENRA Group Berhad Carry?

The image below, which you can click on for greater detail, shows that ENRA Group Berhad had debt of RM7.46m at the end of June 2022, a reduction from RM64.4m over a year. However, its balance sheet shows it holds RM16.3m in cash, so it actually has RM8.83m net cash.

How Healthy Is ENRA Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that ENRA Group Berhad had liabilities of RM24.5m falling due within a year, and liabilities of RM31.4m due beyond that. Offsetting these obligations, it had cash of RM16.3m as well as receivables valued at RM12.8m due within 12 months. So it has liabilities totalling RM26.8m more than its cash and near-term receivables, combined.

ENRA Group Berhad has a market capitalization of RM84.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, ENRA Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, ENRA Group Berhad reported revenue of RM58m, which is a gain of 3.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is ENRA Group Berhad?

Although ENRA Group Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM1.8m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example - ENRA Group Berhad has 1 warning sign we think you should be aware of.

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.