Is WCT Holdings Berhad (KLSE:WCT) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, WCT Holdings Berhad (KLSE:WCT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 WCT Holdings Berhad

How Much Debt Does WCT Holdings Berhad Carry?

As you can see below, at the end of March 2024, WCT Holdings Berhad had RM3.15b of debt, up from RM2.83b a year ago. Click the image for more detail. On the flip side, it has RM431.2m in cash leading to net debt of about RM2.72b.

How Healthy Is WCT Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that WCT Holdings Berhad had liabilities of RM3.17b due within a year, and liabilities of RM1.86b falling due after that. Offsetting these obligations, it had cash of RM431.2m as well as receivables valued at RM2.80b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM1.79b.

Given this deficit is actually higher than the company's market capitalization of RM1.26b, we think shareholders really should watch WCT Holdings Berhad's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WCT Holdings Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year WCT Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 6.0%, to RM1.8b. We would much prefer see growth.

Caveat Emptor

Importantly, WCT Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM152m at the EBIT level. 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. It's fair to say the loss of RM230m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. Case in point: We've spotted 2 warning signs for WCT Holdings Berhad you should be aware of, and 1 of them is concerning.

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.

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