Eden Berhad (KLSE:EDEN) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Eden Inc. Berhad (KLSE:EDEN) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Eden Berhad

What Is Eden Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Eden Berhad had debt of RM34.6m at the end of September 2022, a reduction from RM47.2m over a year. But it also has RM85.0m in cash to offset that, meaning it has RM50.4m net cash.

A Look At Eden Berhad's Liabilities

The latest balance sheet data shows that Eden Berhad had liabilities of RM89.4m due within a year, and liabilities of RM45.8m falling due after that. Offsetting this, it had RM85.0m in cash and RM54.5m in receivables that were due within 12 months. So it can boast RM4.22m more liquid assets than total liabilities.

This surplus suggests that Eden Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Eden Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Eden Berhad improved its EBIT from a last year's loss to a positive RM6.0m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Eden 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. While Eden 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. Happily for any shareholders, Eden Berhad actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Eden Berhad has RM50.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 199% of that EBIT to free cash flow, bringing in RM12m. So we are not troubled with Eden Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Eden Berhad you should know about.

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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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.