Health Check: How Prudently Does Worldgate Global Logistics (HKG:8292) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Worldgate Global Logistics Ltd (HKG:8292) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Worldgate Global Logistics

What Is Worldgate Global Logistics's Debt?

The chart below, which you can click on for greater detail, shows that Worldgate Global Logistics had RM12.2m in debt in June 2020; about the same as the year before. But it also has RM15.6m in cash to offset that, meaning it has RM3.39m net cash.

How Strong Is Worldgate Global Logistics's Balance Sheet?

The latest balance sheet data shows that Worldgate Global Logistics had liabilities of RM9.22m due within a year, and liabilities of RM13.0m falling due after that. On the other hand, it had cash of RM15.6m and RM20.5m worth of receivables due within a year. So it can boast RM13.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Worldgate Global Logistics's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Worldgate Global Logistics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Worldgate Global Logistics 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, Worldgate Global Logistics reported revenue of RM72m, which is a gain of 5.1%, 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.

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 we do note that Worldgate Global Logistics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM6.0m and booked a RM4.6m accounting loss. With only RM3.39m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Worldgate Global Logistics (2 are a bit concerning!) that you should be aware of before investing here.

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. 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.
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