Ta Win Holdings Berhad (KLSE:TAWIN) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Ta Win Holdings Berhad (KLSE:TAWIN) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, 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.

See our latest analysis for Ta Win Holdings Berhad

What Is Ta Win Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Ta Win Holdings Berhad had RM134.7m of debt, an increase on RM107.5m, over one year. However, because it has a cash reserve of RM35.3m, its net debt is less, at about RM99.4m.

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 RM155.1m falling due within a year, and liabilities of RM26.7m due beyond that. Offsetting this, it had RM35.3m in cash and RM103.0m in receivables that were due within 12 months. So it has liabilities totalling RM43.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Ta Win Holdings Berhad is worth RM86.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Ta Win 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.

Over 12 months, Ta Win Holdings Berhad reported revenue of RM704m, which is a gain of 15%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Ta Win Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM20m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM31m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 4 warning signs for Ta Win Holdings Berhad (3 are a bit unpleasant!) that you should be aware of before investing here.

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.