Is WZ Satu Berhad (KLSE:WZSATU) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that WZ Satu Berhad (KLSE:WZSATU) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for WZ Satu Berhad

What Is WZ Satu Berhad's Net Debt?

As you can see below, WZ Satu Berhad had RM61.5m of debt at December 2021, down from RM73.0m a year prior. However, it does have RM73.9m in cash offsetting this, leading to net cash of RM12.5m.

A Look At WZ Satu Berhad's Liabilities

According to the last reported balance sheet, WZ Satu Berhad had liabilities of RM142.7m due within 12 months, and liabilities of RM16.6m due beyond 12 months. On the other hand, it had cash of RM73.9m and RM134.3m worth of receivables due within a year. So it can boast RM48.9m more liquid assets than total liabilities.

This excess liquidity suggests that WZ Satu Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, WZ Satu Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, WZ Satu Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM12m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is WZ Satu 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. WZ Satu Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, WZ Satu Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that WZ Satu Berhad has net cash of RM12.5m, as well as more liquid assets than liabilities. So we don't have any problem with WZ Satu Berhad's use of debt. 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. Case in point: We've spotted 3 warning signs for WZ Satu Berhad you should be aware of, and 1 of them can't be ignored.

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.