Here's Why Ta Win Holdings Berhad (KLSE:TAWIN) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Ta Win Holdings Berhad (KLSE:TAWIN) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Ta Win Holdings Berhad

What Is Ta Win Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Ta Win Holdings Berhad had debt of RM116.2m, up from RM110.3m in one year. On the flip side, it has RM50.9m in cash leading to net debt of about RM65.3m.

How Healthy Is Ta Win Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Ta Win Holdings Berhad had liabilities of RM124.4m due within a year, and liabilities of RM33.1m falling due after that. Offsetting these obligations, it had cash of RM50.9m as well as receivables valued at RM80.8m due within 12 months. So it has liabilities totalling RM25.7m more than its cash and near-term receivables, combined.

Ta Win Holdings Berhad has a market capitalization of RM103.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ta Win Holdings Berhad will need earnings to service that debt. 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.

In the last year Ta Win Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 10%, to RM591m. That's not what we would hope to see.

Caveat Emptor

Not only did Ta Win Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM39m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM18m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Ta Win Holdings Berhad (of which 3 are potentially serious!) 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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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.