Widad Group Berhad (KLSE:WIDAD) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Widad Group Berhad (KLSE:WIDAD) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Widad Group Berhad

What Is Widad Group Berhad's Net Debt?

As you can see below, Widad Group Berhad had RM419.5m of debt at June 2024, down from RM444.4m a year prior. However, it does have RM118.0m in cash offsetting this, leading to net debt of about RM301.5m.

How Strong Is Widad Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Widad Group Berhad had liabilities of RM158.2m due within 12 months and liabilities of RM444.8m due beyond that. Offsetting these obligations, it had cash of RM118.0m as well as receivables valued at RM407.2m due within 12 months. So its liabilities total RM77.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Widad Group Berhad has a market capitalization of RM139.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 22%, to RM186m. 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. Indeed, it lost a very considerable RM18m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 RM15m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 4 warning signs we've spotted with Widad Group Berhad (including 3 which don't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.