Is White Horse Berhad (KLSE:WTHORSE) A Risky Investment?

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.' 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. Importantly, White Horse Berhad (KLSE:WTHORSE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 White Horse Berhad

What Is White Horse Berhad's Net Debt?

As you can see below, White Horse Berhad had RM69.0m of debt at December 2021, down from RM113.4m a year prior. However, its balance sheet shows it holds RM177.6m in cash, so it actually has RM108.6m net cash.

A Look At White Horse Berhad's Liabilities

We can see from the most recent balance sheet that White Horse Berhad had liabilities of RM154.5m falling due within a year, and liabilities of RM954.0k due beyond that. Offsetting these obligations, it had cash of RM177.6m as well as receivables valued at RM115.3m due within 12 months. So it actually has RM137.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that White Horse Berhad's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that White Horse Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, White Horse Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM38m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since White Horse Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While White Horse 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. Looking at the most recent year, White Horse Berhad recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case White Horse Berhad has RM108.6m in net cash and a strong balance sheet. So is White Horse 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with White Horse Berhad .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.