Here's Why UWC Berhad (KLSE:UWC) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that UWC Berhad (KLSE:UWC) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is UWC Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of January 2025 UWC Berhad had RM8.00m of debt, an increase on none, over one year. However, its balance sheet shows it holds RM55.5m in cash, so it actually has RM47.5m net cash.

How Healthy Is UWC Berhad's Balance Sheet?

According to the last reported balance sheet, UWC Berhad had liabilities of RM70.1m due within 12 months, and liabilities of RM16.3m due beyond 12 months. On the other hand, it had cash of RM55.5m and RM184.9m worth of receivables due within a year. So it actually has RM154.0m more liquid assets than total liabilities.

This short term liquidity is a sign that UWC Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, UWC Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for UWC Berhad

On top of that, UWC Berhad grew its EBIT by 96% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine UWC Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While UWC 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. In the last three years, UWC Berhad created free cash flow amounting to 6.8% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that UWC Berhad has net cash of RM47.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 96% over the last year. So we don't think UWC Berhad's use of debt is 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 UWC Berhad has 2 warning signs (and 1 which is concerning) we think you should know about.

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.

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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.