Would Eversafe Rubber Berhad (KLSE:ESAFE) Be Better Off With Less Debt?

Stock Analysis

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.' 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 can see that Eversafe Rubber Berhad (KLSE:ESAFE) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Eversafe Rubber Berhad

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Eversafe Rubber Berhad had RM48.7m of debt, an increase on RM40.4m, over one year. However, it also had RM24.5m in cash, and so its net debt is RM24.2m.

Zooming in on the latest balance sheet data, we can see that Eversafe Rubber Berhad had liabilities of RM44.9m due within 12 months and liabilities of RM24.0m due beyond that. On the other hand, it had cash of RM24.5m and RM43.6m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Eversafe Rubber Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the RM49.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 Eversafe Rubber Berhad will need earnings to service that debt. 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.

Over 12 months, Eversafe Rubber Berhad reported revenue of RM142m, which is a gain of 16%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Importantly, Eversafe Rubber Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM700k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM4.1m of cash over the last year. So in short it's a really risky stock. 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 4 warning signs we've spotted with Eversafe Rubber Berhad (including 2 which don't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Find out whether Eversafe Rubber Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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.

Eversafe Rubber Berhad, an investment holding company, develops, manufactures, and distributes tyre retreading materials to tyre retreaders and rubber material traders.

Slightly overvalued with imperfect balance sheet.