These 4 Measures Indicate That Ta Win Holdings Berhad (KLSE:TAWIN) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. We can see that Ta Win Holdings Berhad (KLSE:TAWIN) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, 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 Ta Win Holdings Berhad had debt of RM78.6m at the end of March 2022, a reduction from RM85.2m over a year. However, its balance sheet shows it holds RM126.9m in cash, so it actually has RM48.4m net cash.

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 RM118.6m due within 12 months and liabilities of RM12.8m due beyond that. Offsetting these obligations, it had cash of RM126.9m as well as receivables valued at RM81.4m due within 12 months. So it actually has RM76.9m more liquid assets than total liabilities.

This excess liquidity suggests that Ta Win Holdings Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Ta Win Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Ta Win Holdings Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM3.2m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ta Win Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Ta Win Holdings Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ta Win Holdings Berhad has RM48.4m 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. 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. For example, we've discovered 3 warning signs for Ta Win Holdings Berhad (2 make us uncomfortable!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.