Is Envictus International Holdings (SGX:BQD) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Envictus International Holdings Limited (SGX:BQD) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Envictus International Holdings

What Is Envictus International Holdings's Debt?

As you can see below, at the end of September 2021, Envictus International Holdings had RM268.1m of debt, up from RM247.3m a year ago. Click the image for more detail. On the flip side, it has RM17.3m in cash leading to net debt of about RM250.9m.

How Healthy Is Envictus International Holdings' Balance Sheet?

The latest balance sheet data shows that Envictus International Holdings had liabilities of RM255.2m due within a year, and liabilities of RM240.6m falling due after that. Offsetting this, it had RM17.3m in cash and RM41.7m in receivables that were due within 12 months. So it has liabilities totalling RM436.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM102.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Envictus International Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Envictus International Holdings 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, Envictus International Holdings made a loss at the EBIT level, and saw its revenue drop to RM382m, which is a fall of 4.4%. That's not what we would hope to see.

Caveat Emptor

Importantly, Envictus International Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM39m. 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 lost RM48m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Envictus International Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.