Is Warisan TC Holdings Berhad (KLSE:WARISAN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Warisan TC Holdings Berhad (KLSE:WARISAN) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Warisan TC Holdings Berhad

What Is Warisan TC Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Warisan TC Holdings Berhad had debt of RM215.9m at the end of September 2020, a reduction from RM225.4m over a year. However, because it has a cash reserve of RM139.1m, its net debt is less, at about RM76.7m.

A Look At Warisan TC Holdings Berhad's Liabilities

According to the last reported balance sheet, Warisan TC Holdings Berhad had liabilities of RM378.9m due within 12 months, and liabilities of RM31.5m due beyond 12 months. Offsetting this, it had RM139.1m in cash and RM109.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM161.9m.

This deficit casts a shadow over the RM87.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Warisan TC Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Warisan TC 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.

In the last year Warisan TC Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 28%, to RM323m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Warisan TC Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM30m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of RM39m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Warisan TC Holdings Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

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. 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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