Is WCT Holdings Berhad (KLSE:WCT) Using Debt Sensibly?

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.' 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. As with many other companies WCT Holdings Berhad (KLSE:WCT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for WCT Holdings Berhad

What Is WCT Holdings Berhad's Net Debt?

As you can see below, WCT Holdings Berhad had RM2.84b of debt at December 2021, down from RM2.96b a year prior. On the flip side, it has RM283.7m in cash leading to net debt of about RM2.55b.

A Look At WCT Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that WCT Holdings Berhad had liabilities of RM2.88b due within 12 months and liabilities of RM1.61b due beyond that. Offsetting these obligations, it had cash of RM283.7m as well as receivables valued at RM2.26b due within 12 months. So it has liabilities totalling RM1.95b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM822.0m 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, WCT 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 it is future earnings, more than anything, that will determine WCT Holdings 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.

In the last year WCT Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 2.8%, to RM1.8b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, WCT Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM98m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of RM153m and the profit of RM97m. So one might argue that there's still a chance it can get things on the right track. 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. Be aware that WCT Holdings Berhad is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.