We Think Hwa Tai Industries Berhad (KLSE:HWATAI) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hwa Tai Industries Berhad (KLSE:HWATAI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that HWATAI is potentially overvalued!

What Is Hwa Tai Industries Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Hwa Tai Industries Berhad had RM23.9m of debt, an increase on RM20.2m, over one year. On the flip side, it has RM5.29m in cash leading to net debt of about RM18.6m.

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

We can see from the most recent balance sheet that Hwa Tai Industries Berhad had liabilities of RM41.3m falling due within a year, and liabilities of RM2.28m due beyond that. Offsetting this, it had RM5.29m in cash and RM20.5m in receivables that were due within 12 months. So it has liabilities totalling RM17.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Hwa Tai Industries Berhad is worth RM45.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hwa Tai Industries Berhad will need earnings to service that debt. 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.

In the last year Hwa Tai Industries Berhad's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Hwa Tai Industries Berhad produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM3.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM6.2m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should learn about the 2 warning signs we've spotted with Hwa Tai Industries Berhad (including 1 which can't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.