These 4 Measures Indicate That Wegmans Holdings Berhad (KLSE:WEGMANS) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Wegmans Holdings Berhad (KLSE:WEGMANS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Wegmans Holdings Berhad

What Is Wegmans Holdings Berhad's Debt?

As you can see below, at the end of March 2021, Wegmans Holdings Berhad had RM45.2m of debt, up from RM27.7m a year ago. Click the image for more detail. However, because it has a cash reserve of RM7.93m, its net debt is less, at about RM37.3m.

A Look At Wegmans Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Wegmans Holdings Berhad had liabilities of RM42.2m falling due within a year, and liabilities of RM30.9m due beyond that. Offsetting this, it had RM7.93m in cash and RM15.1m in receivables that were due within 12 months. So its liabilities total RM50.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Wegmans Holdings Berhad has a market capitalization of RM148.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Wegmans Holdings Berhad's net debt is only 0.91 times its EBITDA. And its EBIT easily covers its interest expense, being 36.1 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Wegmans Holdings Berhad grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Wegmans Holdings Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Wegmans Holdings 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.

Our View

Wegmans Holdings Berhad's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Wegmans Holdings Berhad is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. To that end, you should learn about the 4 warning signs we've spotted with Wegmans Holdings Berhad (including 2 which are potentially serious) .

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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