Is Wah Seong Corporation Berhad (KLSE:WASEONG) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Wah Seong Corporation Berhad (KLSE:WASEONG) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wah Seong Corporation Berhad

What Is Wah Seong Corporation Berhad's Debt?

As you can see below, Wah Seong Corporation Berhad had RM910.5m of debt at September 2020, down from RM968.1m a year prior. However, because it has a cash reserve of RM214.4m, its net debt is less, at about RM696.1m.

How Healthy Is Wah Seong Corporation Berhad's Balance Sheet?

The latest balance sheet data shows that Wah Seong Corporation Berhad had liabilities of RM1.26b due within a year, and liabilities of RM415.4m falling due after that. Offsetting these obligations, it had cash of RM214.4m as well as receivables valued at RM615.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM849.2m.

When you consider that this deficiency exceeds the company's RM580.7m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Wah Seong Corporation 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.

In the last year Wah Seong Corporation Berhad had a loss before interest and tax, and actually shrunk its revenue by 48%, to RM1.5b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Wah Seong Corporation Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM293m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of RM360m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Wah Seong Corporation Berhad (of which 1 is potentially serious!) 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.

If you’re looking to trade Wah Seong Corporation Berhad, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.