Does Hwa Tai Industries Berhad (KLSE:HWATAI) Have A Healthy Balance Sheet?

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. As with many other companies Hwa Tai Industries Berhad (KLSE:HWATAI) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hwa Tai Industries Berhad

What Is Hwa Tai Industries Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Hwa Tai Industries Berhad had RM33.2m of debt, an increase on RM23.9m, over one year. On the flip side, it has RM6.78m in cash leading to net debt of about RM26.5m.

How Strong Is Hwa Tai Industries Berhad's Balance Sheet?

According to the last reported balance sheet, Hwa Tai Industries Berhad had liabilities of RM45.9m due within 12 months, and liabilities of RM15.8m due beyond 12 months. On the other hand, it had cash of RM6.78m and RM23.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM31.3m.

This deficit is considerable relative to its market capitalization of RM36.3m, so it does suggest shareholders should keep an eye on Hwa Tai Industries Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hwa Tai Industries 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.

Over 12 months, Hwa Tai Industries Berhad reported revenue of RM75m, which is a gain of 2.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Hwa Tai Industries Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM5.9m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM3.9m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hwa Tai Industries Berhad has 3 warning signs we think you should be aware of.

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. 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.