We Think Eden Berhad (KLSE:EDEN) Can Stay On Top Of Its 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.' 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. We can see that Eden Inc. Berhad (KLSE:EDEN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Eden Berhad

How Much Debt Does Eden Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Eden Berhad had RM22.0m of debt in June 2023, down from RM44.1m, one year before. However, it does have RM42.9m in cash offsetting this, leading to net cash of RM20.9m.

A Look At Eden Berhad's Liabilities

According to the last reported balance sheet, Eden Berhad had liabilities of RM70.4m due within 12 months, and liabilities of RM34.1m due beyond 12 months. Offsetting these obligations, it had cash of RM42.9m as well as receivables valued at RM71.0m due within 12 months. So it actually has RM9.32m 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!

Importantly, Eden Berhad grew its EBIT by 93% over the last twelve months, and that growth will make it easier to handle its debt. 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. During the last two years, Eden Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Eden Berhad has RM20.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 93% year-on-year EBIT growth. So we are not troubled with Eden Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Eden Berhad (including 1 which is potentially serious) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.