We Think UMW Holdings Berhad (KLSE:UMW) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that UMW Holdings Berhad (KLSE:UMW) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 RM2.26b of debt in March 2021, down from RM2.52b, one year before. However, it does have RM2.91b in cash offsetting this, leading to net cash of RM649.2m.

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 RM2.46b falling due within a year, and liabilities of RM2.22b due beyond that. On the other hand, it had cash of RM2.91b and RM1.20b worth of receivables due within a year. So its liabilities total RM565.7m more than the combination of its cash and short-term receivables.

Given UMW Holdings Berhad has a market capitalization of RM3.66b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

One way UMW Holdings Berhad could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 19%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine UMW Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, UMW Holdings Berhad's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although UMW Holdings Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM649.2m. And it impressed us with its EBIT growth of 19% over the last year. So we don't have any problem with UMW Holdings Berhad's use of debt. 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. For example, we've discovered 1 warning sign for UMW Holdings Berhad that you should be aware of before investing here.

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. 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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