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Eu Yan Sang International Ltd’s Latest Earnings: Weak Financial Health Hurting The Bottom-Line

Eu Yan Sang International Ltd (SGX: E02) announced its fiscal first-quarter results earlier today. Here are the highlights.

The finances and the business

The health and wellness company, which sells traditional Chinese medicine (TCM) products in a number of countries including Singapore and Hong Kong, experienced a weak start for the fiscal year ending 30 June 2016 (FY2016).

Revenue for the first-quarter fell by 9% year-on-year to S$75.2 million. And because of a lower gross margin (a fall from 51.5% to 48.4%), higher expenses, and a rise in interest costs, Eu Yan Sang clocked a quarterly loss of S$150,000 for its owners.

The spike in interest costs may be worthy of particular attention. During the reporting quarter, Eu Yan Sang’s interest expenses rose to S$1.56 million from S$1.34 million a year ago, bringing its interest coverage ratio to less than 1.

Eu Yan Sang reports its revenue streams in terms of both business activity as well as geography.

For the former, it was the Wholesale business, which saw revenue fall a huge 48%, that accounted for the bulk of Eu Yan Sang’s total revenue decline. The Wholesale business in Hong Kong was affected by the slowdown in spending from Mainland tourists; in Australia, the business had been hit by a weaker Australian dollar.

For the latter (geography), Hong Kong and Malaysia were the big culprits for the revenue dip. In Hong Kong, Eu Yan Sang’s revenue had suffered in both Hong Kong dollar terms (30% year-on-year decline) and Singapore dollar terms (21% decline). In Malaysia, revenue fell 16% to just S$11.6 million as the Malaysian ringgit saw a sharp decline. During the reporting period, Eu Yan Sang had to close down five company-operated retail stores in the country presumably due to a worsening of business conditions.

Moving on to the topic of Eu Yan Sang’s financial health, the company’s net debt to equity ratio had increased to 94% from 92% in the previous sequential quarter and from 70% a year ago. The higher borrowings on a year-on-year basis was what had led to the rise in interest costs discussed earlier.

Looking at the cash flow statement for the fiscal first-quarter, Eu Yan Sang has recorded negative quarterly operating cash flow. If the weak business outlook continues for the company, its high levels of debt might cause some serious issues in the future.

Foolish Summary

On the bright side, Eu Yan Sang had enjoyed double-digit same store sales growth in Australia. The company is planning to expand its network in Australia, possibly by acquiring seven health food retail stores that are owned by Venture Integrity Health. Although there are some bright spots in the business, Eu Yan Sang’s high debt has weakened its financial health and that may be a cause for concern.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.