Here's Why Widad Group Berhad (KLSE:WIDAD) Can Afford Some Debt

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.' 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. We can see that Widad Group Berhad (KLSE:WIDAD) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Widad Group Berhad

What Is Widad Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Widad Group Berhad had debt of RM439.9m, up from RM409.6m in one year. However, it also had RM146.4m in cash, and so its net debt is RM293.5m.

How Strong Is Widad Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Widad Group Berhad had liabilities of RM118.9m falling due within a year, and liabilities of RM458.3m due beyond that. Offsetting this, it had RM146.4m in cash and RM328.2m in receivables that were due within 12 months. So it has liabilities totalling RM102.7m more than its cash and near-term receivables, combined.

Of course, Widad Group Berhad has a market capitalization of RM588.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Widad Group Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Widad Group Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to RM182m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Widad Group Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at RM22m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM112m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Widad Group Berhad (including 3 which are potentially serious) .

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.