Ta Win Holdings Berhad (KLSE:TAWIN) Has A Pretty Healthy Balance Sheet

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. We can see that Ta Win Holdings Berhad (KLSE:TAWIN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that TAWIN is potentially overvalued!

How Much Debt Does Ta Win Holdings Berhad Carry?

The chart below, which you can click on for greater detail, shows that Ta Win Holdings Berhad had RM81.5m in debt in June 2022; about the same as the year before. But it also has RM113.1m in cash to offset that, meaning it has RM31.6m net cash.

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

The latest balance sheet data shows that Ta Win Holdings Berhad had liabilities of RM112.8m due within a year, and liabilities of RM17.5m falling due after that. Offsetting this, it had RM113.1m in cash and RM78.2m in receivables that were due within 12 months. So it can boast RM61.0m more liquid assets than total liabilities.

This luscious liquidity implies that Ta Win Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Ta Win Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Ta Win Holdings Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM441k in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ta Win Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ta Win Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Ta Win Holdings Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ta Win Holdings Berhad has RM31.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Ta Win Holdings Berhad's use of debt. 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. We've identified 3 warning signs with Ta Win Holdings Berhad (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.