Edaran Berhad (KLSE:EDARAN) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Edaran Berhad (KLSE:EDARAN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Edaran Berhad

How Much Debt Does Edaran Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Edaran Berhad had RM7.89m of debt, an increase on RM7.57m, over one year. But it also has RM9.21m in cash to offset that, meaning it has RM1.32m net cash.

How Strong Is Edaran Berhad's Balance Sheet?

The latest balance sheet data shows that Edaran Berhad had liabilities of RM19.8m due within a year, and liabilities of RM7.63m falling due after that. Offsetting this, it had RM9.21m in cash and RM14.9m in receivables that were due within 12 months. So its liabilities total RM3.28m more than the combination of its cash and short-term receivables.

Of course, Edaran Berhad has a market capitalization of RM21.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Edaran Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Edaran Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Edaran Berhad reported revenue of RM51m, which is a gain of 30%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Edaran Berhad?

While Edaran Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM2.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Edaran Berhad shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. Take risks, for example - Edaran Berhad has 2 warning signs 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. 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.
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