Is Wong Engineering Corporation Berhad (KLSE:WONG) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Wong Engineering Corporation Berhad (KLSE:WONG) makes use of debt. But is this debt a concern to shareholders?

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. 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. 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 Wong Engineering Corporation Berhad

What Is Wong Engineering Corporation Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2023 Wong Engineering Corporation Berhad had RM41.0m of debt, an increase on RM19.9m, over one year. However, it does have RM26.4m in cash offsetting this, leading to net debt of about RM14.6m.

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

We can see from the most recent balance sheet that Wong Engineering Corporation Berhad had liabilities of RM12.8m falling due within a year, and liabilities of RM36.2m due beyond that. On the other hand, it had cash of RM26.4m and RM10.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM12.0m.

Since publicly traded Wong Engineering Corporation Berhad shares are worth a total of RM65.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Wong Engineering Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Wong Engineering Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 29%, to RM53m. That makes us nervous, to say the least.

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 RM3.3m 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 RM11m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Wong Engineering Corporation Berhad (1 can't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.