Is Wong Engineering Corporation Berhad (KLSE:WONG) A Risky Investment?

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

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wong Engineering Corporation Berhad

How Much Debt Does Wong Engineering Corporation Berhad Carry?

The image below, which you can click on for greater detail, shows that at April 2024 Wong Engineering Corporation Berhad had debt of RM41.1m, up from RM34.1m in one year. However, it also had RM22.3m in cash, and so its net debt is RM18.8m.

How Healthy Is Wong Engineering Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, Wong Engineering Corporation Berhad had liabilities of RM10.8m due within 12 months, and liabilities of RM36.2m due beyond 12 months. Offsetting these obligations, it had cash of RM22.3m as well as receivables valued at RM9.12m due within 12 months. So its liabilities total RM15.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Wong Engineering Corporation Berhad is worth RM63.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wong Engineering Corporation 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.

Over 12 months, Wong Engineering Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM40m, which is a fall of 42%. To be frank that doesn't bode well.

Caveat Emptor

While Wong Engineering Corporation Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM6.9m 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. However, it doesn't help that it burned through RM9.3m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 3 warning signs for Wong Engineering Corporation Berhad (1 is concerning!) that you should be aware of before investing here.

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.

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.

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