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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Worldgate Global Logistics Ltd (HKG:8292) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses 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.
How Much Debt Does Worldgate Global Logistics Carry?
The image below, which you can click on for greater detail, shows that at December 2021 Worldgate Global Logistics had debt of RM14.0m, up from RM11.9m in one year. However, it does have RM39.8m in cash offsetting this, leading to net cash of RM25.8m.
A Look At Worldgate Global Logistics' Liabilities
According to the last reported balance sheet, Worldgate Global Logistics had liabilities of RM20.6m due within 12 months, and liabilities of RM10.6m due beyond 12 months. Offsetting this, it had RM39.8m in cash and RM21.2m in receivables that were due within 12 months. So it actually has RM29.9m more liquid assets than total liabilities.
This surplus suggests that Worldgate Global Logistics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Worldgate Global Logistics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Worldgate Global Logistics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Worldgate Global Logistics reported revenue of RM89m, which is a gain of 29%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Worldgate Global Logistics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Worldgate Global Logistics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM4.9m of cash and made a loss of RM12m. With only RM25.8m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Worldgate Global Logistics may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Worldgate Global Logistics (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.