Is WTK Holdings Berhad (KLSE: WTK) using too much debt?

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies WTK Holdings Berhad (KLSE: WTK) uses debt. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest review for WTK Holdings Berhad

What is the debt of WTK Holdings Berhad?

You can click on the graph below for historical figures, but it shows that as of June 2021, WTK Holdings Berhad had a debt of RM 265.4 million, an increase from RM 218.3 million, over a year. However, his balance sheet shows that he has 380.2 million RM in cash, so he actually has a net cash position of 114.8 million RM.

KLSE: WTK Debt to equity history October 7, 2021

How healthy is WTK Holdings Berhad’s balance sheet?

The latest balance sheet data shows WTK Holdings Berhad had debts of RM 194.8 million due within one year, and RM 169.3 million debts due thereafter. On the other hand, he had cash of RM 380.2 million and RM 45.7 million of receivables due within one year. So it actually has RM61.9m Following liquid assets as total liabilities.

This surplus suggests that WTK Holdings Berhad is using debt in a way that seems both safe and conservative. Given that he has easily sufficient short-term liquidity, we don’t think he will have any problems with his lenders. In short, WTK Holdings Berhad has clear cash flow, so it’s fair to say it doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since WTK Holdings Berhad will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

In the past year, WTK Holdings Berhad suffered a loss before interest and taxes and in fact reduced its income by 21%, to RM361 million. It makes us nervous, to say the least.

So how risky is WTK Holdings Berhad?

By their very nature, businesses that lose money are riskier than those with a long history of profitability. And the point is that over the past twelve months, WTK Holdings Berhad has lost money in earnings before interest and taxes (EBIT). And in the same period, it recorded a negative free cash outflow of RM 25 million and recorded an accounting loss of RM 139 million. With only RM 114.8 million on the balance sheet, it looks like it will soon have to raise capital again. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce regular free cash flow. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Be aware that WTK Holdings Berhad shows 3 warning signs in our investment analysis , and 1 of them cannot be ignored …

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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