Is Ewein Berhad (KLSE:EWEIN) A Risky Investment?

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. We note that Ewein Berhad (KLSE:EWEIN) 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, 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 Ewein Berhad had RM18.8m of debt in December 2021, down from RM21.5m, one year before. But on the other hand it also has RM39.3m in cash, leading to a RM20.5m net cash position.

How Strong Is Ewein Berhad's Balance Sheet?

According to the last reported balance sheet, Ewein Berhad had liabilities of RM38.5m due within 12 months, and liabilities of RM19.6m due beyond 12 months. Offsetting this, it had RM39.3m in cash and RM50.0m in receivables that were due within 12 months. So it can boast RM31.1m more liquid assets than total liabilities.

This luscious liquidity implies that Ewein Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Ewein Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Ewein Berhad's saving grace is its low debt levels, because its EBIT has tanked 64% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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 RM20.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in RM27m. So is Ewein Berhad's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Ewein Berhad you should be aware of, and 1 of them is a bit 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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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.