Is Widad Group Berhad (KLSE:WIDAD) Using Too Much Debt?

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.' 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 Widad Group Berhad (KLSE:WIDAD) does use debt in its business. But the more important question is: how much risk is that debt creating?

Our free stock report includes 4 warning signs investors should be aware of before investing in Widad Group Berhad. Read for free now.

When Is Debt Dangerous?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Widad Group Berhad Carry?

The image below, which you can click on for greater detail, shows that Widad Group Berhad had debt of RM422.6m at the end of December 2024, a reduction from RM463.3m over a year. However, it does have RM131.8m in cash offsetting this, leading to net debt of about RM290.8m.

How Strong Is Widad Group Berhad's Balance Sheet?

The latest balance sheet data shows that Widad Group Berhad had liabilities of RM215.2m due within a year, and liabilities of RM390.5m falling due after that. On the other hand, it had cash of RM131.8m and RM415.2m worth of receivables due within a year. So it has liabilities totalling RM58.7m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Widad Group Berhad has a market capitalization of RM124.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Widad Group 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.

See our latest analysis for Widad Group Berhad

In the last year Widad Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 40%, to RM138m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Widad Group 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 RM18m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of RM24m. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Widad Group Berhad is showing 4 warning signs in our investment analysis , and 3 of those are concerning...

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.

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.