Is White Horse Berhad (KLSE:WTHORSE) 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.' 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 note that White Horse Berhad (KLSE:WTHORSE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for White Horse Berhad

How Much Debt Does White Horse Berhad Carry?

The image below, which you can click on for greater detail, shows that White Horse Berhad had debt of RM121.0m at the end of September 2020, a reduction from RM170.6m over a year. However, it does have RM92.1m in cash offsetting this, leading to net debt of about RM28.9m.

How Healthy Is White Horse Berhad's Balance Sheet?

We can see from the most recent balance sheet that White Horse Berhad had liabilities of RM188.2m falling due within a year, and liabilities of RM71.7m due beyond that. Offsetting this, it had RM92.1m in cash and RM109.8m in receivables that were due within 12 months. So its liabilities total RM58.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because White Horse Berhad is worth RM148.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is White Horse 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, White Horse Berhad made a loss at the EBIT level, and saw its revenue drop to RM410m, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

Not only did White Horse Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM80m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM79m. In the meantime, we consider the stock very risky. 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. To that end, you should learn about the 2 warning signs we've spotted with White Horse Berhad (including 1 which is a bit concerning) .

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. 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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