We Think Wong Engineering Corporation Berhad (KLSE:WONG) Can Manage Its Debt With Ease

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. We can see that Wong Engineering Corporation Berhad (KLSE:WONG) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Wong Engineering Corporation Berhad

What Is Wong Engineering Corporation Berhad's Net Debt?

As you can see below, Wong Engineering Corporation Berhad had RM15.7m of debt at April 2021, down from RM17.7m a year prior. But on the other hand it also has RM21.4m in cash, leading to a RM5.72m net cash position.

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

According to the last reported balance sheet, Wong Engineering Corporation Berhad had liabilities of RM20.8m due within 12 months, and liabilities of RM13.8m due beyond 12 months. Offsetting this, it had RM21.4m in cash and RM30.5m in receivables that were due within 12 months. So it actually has RM17.2m more liquid assets than total liabilities.

This surplus suggests that Wong Engineering Corporation Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Wong Engineering Corporation Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Wong Engineering Corporation Berhad grew its EBIT by 111% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Wong Engineering Corporation Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Wong Engineering Corporation Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Wong Engineering Corporation Berhad has net cash of RM5.72m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM7.1m, being 114% of its EBIT. So is Wong Engineering Corporation Berhad's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Wong Engineering Corporation Berhad , and understanding them should be part of your investment process.

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.

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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.
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