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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Wong Engineering Corporation Berhad (KLSE:WONG) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Wong Engineering Corporation Berhad

What Is Wong Engineering Corporation Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at January 2022 Wong Engineering Corporation Berhad had debt of RM22.7m, up from RM16.2m in one year. However, it does have RM29.1m in cash offsetting this, leading to net cash of RM6.40m.

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

According to the last reported balance sheet, Wong Engineering Corporation Berhad had liabilities of RM13.3m due within 12 months, and liabilities of RM19.0m due beyond 12 months. Offsetting these obligations, it had cash of RM29.1m as well as receivables valued at RM18.6m due within 12 months. So it can boast RM15.5m 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.

In addition to that, we're happy to report that Wong Engineering Corporation Berhad has boosted its EBIT by 77%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wong Engineering Corporation 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Wong Engineering Corporation Berhad produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Wong Engineering Corporation Berhad has RM6.40m in net cash and a decent-looking balance sheet. And we liked the look of last year's 77% year-on-year EBIT growth. So is Wong Engineering Corporation Berhad's debt a risk? It doesn't seem so to us. 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 Wong Engineering Corporation Berhad is showing 4 warning signs in our investment analysis , you should know about...

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.