Here's Why Ta Win Holdings Berhad (KLSE:TAWIN) Can Manage Its Debt Despite Losing Money

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Ta Win Holdings Berhad (KLSE:TAWIN) makes use of debt. But is this debt a concern to shareholders?

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, 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.

View our latest analysis for Ta Win Holdings Berhad

What Is Ta Win Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Ta Win Holdings Berhad had debt of RM81.9m, up from RM56.5m in one year. But on the other hand it also has RM199.7m in cash, leading to a RM117.8m net cash position.

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

We can see from the most recent balance sheet that Ta Win Holdings Berhad had liabilities of RM106.8m falling due within a year, and liabilities of RM11.0m due beyond that. Offsetting these obligations, it had cash of RM199.7m as well as receivables valued at RM66.3m due within 12 months. So it can boast RM148.1m more liquid assets than total liabilities.

This surplus suggests that Ta Win Holdings Berhad is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Ta Win Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Ta Win Holdings Berhad reported revenue of RM491m, which is a gain of 95%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Ta Win Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Ta Win Holdings Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM41m of cash and made a loss of RM12m. Given it only has net cash of RM117.8m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Ta Win Holdings Berhad may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 example, we've discovered 2 warning signs for Ta Win Holdings Berhad that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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