These 4 metrics indicate that PWF Corporation Bhd (KLSE:PWF) is making extensive use of debt

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that PWF Corporation Bhd. (KLSE:PWF) has debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt dangerous?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for PWF Corporation Bhd

What is the debt of PWF Corporation Bhd?

As you can see below, PWF Corporation Bhd had a debt of RM154.4 million, as of June 2022, which is about the same as the previous year. You can click on the graph for more details. On the other hand, he has RM23.7 million in cash, resulting in a net debt of around RM130.7 million.

KLSE: PWF Debt to Equity History September 5, 2022

How strong is PWF Corporation Bhd’s balance sheet?

The latest balance sheet data shows that PWF Corporation Bhd had liabilities of RM155.2 million due within one year, and liabilities of RM68.2 million falling due thereafter. In return, he had RM23.7 million in cash and RM29.9 million in receivables due within 12 months. It therefore has liabilities totaling RM169.8 million more than its cash and short-term receivables, combined.

This deficit casts a shadow over the RM105.6m company, like a towering colossus of mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, PWF Corporation Bhd would likely need a major recapitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

PWF Corporation Bhd’s debt is 4.4 times its EBITDA, and its EBIT covers its interest expense 2.9 times. Taken together, this implies that, while we wouldn’t like to see debt levels increase, we think he can manage his current leverage. However, shareholders should be reassured to remember that PWF Corporation Bhd has actually increased its EBIT by 132% over the past 12 months. If this earnings trend continues, it will make its leverage much more manageable in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of PWF Corporation Bhd that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past two years, PWF Corporation Bhd has produced strong free cash flow equivalent to 55% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

Reflecting on PWF Corporation Bhd’s attempt to stay above its total liabilities, we are certainly not enthusiastic. But on the bright side, its EBIT growth rate is a good sign and makes us more optimistic. Once we consider all the above factors together, it seems to us that PWF Corporation Bhd’s debt makes it a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, PWF Corporation Bhd has 5 warning signs (and 2 that shouldn’t be ignored) that we think you should know about.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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

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