These 4 Measures Indicate That Ho Wah Genting Berhad (KLSE:HWGB) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Ho Wah Genting Berhad (KLSE:HWGB) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ho Wah Genting Berhad

What Is Ho Wah Genting Berhad's Net Debt?

As you can see below, Ho Wah Genting Berhad had RM18.6m of debt at December 2022, down from RM32.8m a year prior. But on the other hand it also has RM21.6m in cash, leading to a RM3.04m net cash position.

How Strong Is Ho Wah Genting Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ho Wah Genting Berhad had liabilities of RM44.6m due within 12 months and liabilities of RM12.8m due beyond that. Offsetting this, it had RM21.6m in cash and RM16.1m in receivables that were due within 12 months. So its liabilities total RM19.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Ho Wah Genting Berhad has a market capitalization of RM69.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Ho Wah Genting Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Ho Wah Genting Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM1.6m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Ho Wah Genting Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ho Wah Genting 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. Happily for any shareholders, Ho Wah Genting Berhad actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Ho Wah Genting Berhad does have more liabilities than liquid assets, it also has net cash of RM3.04m. And it impressed us with free cash flow of RM31m, being 1,962% of its EBIT. So we are not troubled with Ho Wah Genting Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Ho Wah Genting Berhad that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.