Stock Analysis

Is Powerwell Holdings Berhad (KLSE:PWRWELL) Weighed On By Its Debt Load?

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Powerwell Holdings Berhad (KLSE:PWRWELL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Powerwell Holdings Berhad

What Is Powerwell Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Powerwell Holdings Berhad had debt of RM14.4m, up from RM3.37m in one year. However, it does have RM33.4m in cash offsetting this, leading to net cash of RM19.0m.

KLSE:PWRWELL Debt to Equity History December 1st 2021

How Strong Is Powerwell Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Powerwell Holdings Berhad had liabilities of RM31.3m due within 12 months and liabilities of RM10.8m due beyond that. On the other hand, it had cash of RM33.4m and RM35.9m worth of receivables due within a year. So it actually has RM27.1m more liquid assets than total liabilities.

This excess liquidity suggests that Powerwell Holdings Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Powerwell Holdings Berhad 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 it is Powerwell Holdings Berhad'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.

In the last year Powerwell Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 5.4%, to RM81m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Powerwell Holdings Berhad?

While Powerwell Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM1.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for Powerwell Holdings Berhad (of which 1 is concerning!) you should know about.

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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Find out whether Powerwell Holdings Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.


Powerwell Holdings Berhad

An investment holding company, engages in the design, manufacture, and trading of electrical power distribution products in Malaysia, Bangladesh, Vietnam, Indonesia, Pakistan, Thailand, Singapore, Brunei, Cambodia, and Philippines.

Outstanding track record with excellent balance sheet and pays a dividend.