Eco World International Berhad (KLSE:EWINT) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Eco World International Berhad (KLSE:EWINT) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that EWINT is potentially overvalued!

How Much Debt Does Eco World International Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Eco World International Berhad had RM510.8m of debt in July 2022, down from RM1.07b, one year before. On the flip side, it has RM324.5m in cash leading to net debt of about RM186.3m.

How Healthy Is Eco World International Berhad's Balance Sheet?

We can see from the most recent balance sheet that Eco World International Berhad had liabilities of RM483.1m falling due within a year, and liabilities of RM64.5m due beyond that. Offsetting these obligations, it had cash of RM324.5m as well as receivables valued at RM19.0m due within 12 months. So its liabilities total RM204.2m more than the combination of its cash and short-term receivables.

Eco World International Berhad has a market capitalization of RM708.0m, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Eco World International Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Eco World International Berhad made a loss at the EBIT level, and saw its revenue drop to RM152m, which is a fall of 75%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Eco World International Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM5.6m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM195m into a profit. So in short it's a really risky stock. 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. To that end, you should be aware of the 2 warning signs we've spotted with Eco World International Berhad .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.