Is Envictus International Holdings (SGX:BQD) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Envictus International Holdings Limited (SGX:BQD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Envictus International Holdings

What Is Envictus International Holdings's Debt?

As you can see below, Envictus International Holdings had RM200.1m of debt at March 2022, down from RM244.3m a year prior. However, because it has a cash reserve of RM10.9m, its net debt is less, at about RM189.2m.

How Strong Is Envictus International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Envictus International Holdings had liabilities of RM175.5m falling due within a year, and liabilities of RM236.0m due beyond that. Offsetting these obligations, it had cash of RM10.9m as well as receivables valued at RM47.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM353.4m.

This deficit casts a shadow over the RM112.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Envictus International Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Envictus International Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Envictus International Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to RM425m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Envictus International Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM19m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized RM12m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. We've identified 4 warning signs with Envictus International Holdings (at least 3 which are significant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.