These 4 Measures Indicate That Ewein Berhad (KLSE:EWEIN) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Ewein Berhad

What Is Ewein Berhad's Debt?

As you can see below, Ewein Berhad had RM21.5m of debt at December 2020, down from RM107.5m a year prior. However, its balance sheet shows it holds RM25.1m in cash, so it actually has RM3.59m net cash.

A Look At Ewein Berhad's Liabilities

We can see from the most recent balance sheet that Ewein Berhad had liabilities of RM81.7m falling due within a year, and liabilities of RM24.4m due beyond that. Offsetting these obligations, it had cash of RM25.1m as well as receivables valued at RM79.6m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Ewein Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the RM104.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Ewein Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Ewein Berhad's load is not too heavy, because its EBIT was down 59% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ewein Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Ewein Berhad recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Ewein Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM3.59m. So we don't have any problem with Ewein Berhad's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Ewein Berhad , and understanding them should be part of your investment process.

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.

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