Is UMW Holdings Berhad (KLSE:UMW) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, UMW Holdings Berhad (KLSE:UMW) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for UMW Holdings Berhad

How Much Debt Does UMW Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that UMW Holdings Berhad had RM1.54b of debt in March 2023, down from RM2.65b, one year before. But it also has RM2.62b in cash to offset that, meaning it has RM1.08b net cash.

How Healthy Is UMW Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that UMW Holdings Berhad had liabilities of RM3.22b falling due within a year, and liabilities of RM1.66b due beyond that. On the other hand, it had cash of RM2.62b and RM1.21b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM1.04b.

UMW Holdings Berhad has a market capitalization of RM5.00b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, UMW Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that UMW Holdings Berhad has boosted its EBIT by 96%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if UMW Holdings Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. UMW Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, UMW Holdings Berhad recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While UMW Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM1.08b. And we liked the look of last year's 96% year-on-year EBIT growth. So we don't think UMW Holdings Berhad's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for UMW Holdings Berhad (of which 1 is concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.