Here's Why Ta Win Holdings Berhad (KLSE:TAWIN) Can Afford Some 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.' 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 can see that Ta Win Holdings Berhad (KLSE:TAWIN) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ta Win Holdings Berhad

What Is Ta Win Holdings Berhad's Debt?

As you can see below, at the end of December 2022, Ta Win Holdings Berhad had RM109.0m of debt, up from RM86.9m a year ago. Click the image for more detail. On the flip side, it has RM86.4m in cash leading to net debt of about RM22.6m.

A Look At Ta Win Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Ta Win Holdings Berhad had liabilities of RM127.2m due within 12 months and liabilities of RM36.3m due beyond that. Offsetting these obligations, it had cash of RM86.4m as well as receivables valued at RM77.0m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Ta Win Holdings Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM154.6m company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ta Win Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ta Win Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to RM666m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Ta Win Holdings Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping RM17m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM77m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Ta Win Holdings Berhad (including 2 which shouldn't be ignored) .

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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