Wah Seong Corporation Berhad (KLSE:WASEONG) Has Debt But No Earnings; Should You Worry?

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.' 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 note that Wah Seong Corporation Berhad (KLSE:WASEONG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wah Seong Corporation Berhad

What Is Wah Seong Corporation Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Wah Seong Corporation Berhad had RM878.1m of debt in December 2020, down from RM948.1m, one year before. However, because it has a cash reserve of RM253.1m, its net debt is less, at about RM625.0m.

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

We can see from the most recent balance sheet that Wah Seong Corporation Berhad had liabilities of RM1.18b falling due within a year, and liabilities of RM337.4m due beyond that. Offsetting this, it had RM253.1m in cash and RM474.6m in receivables that were due within 12 months. So it has liabilities totalling RM786.6m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's RM646.5m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Wah Seong Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM1.4b, which is a fall of 44%. That makes us nervous, to say the least.

Caveat Emptor

While Wah Seong Corporation Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost RM29m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM295m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. For riskier companies like Wah Seong Corporation Berhad I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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. 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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