Would Hwa Tai Industries Berhad (KLSE:HWATAI) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Hwa Tai Industries Berhad (KLSE:HWATAI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Hwa Tai Industries Berhad

How Much Debt Does Hwa Tai Industries Berhad Carry?

As you can see below, at the end of December 2021, Hwa Tai Industries Berhad had RM22.8m of debt, up from RM18.3m a year ago. Click the image for more detail. However, because it has a cash reserve of RM12.0m, its net debt is less, at about RM10.8m.

A Look At Hwa Tai Industries Berhad's Liabilities

We can see from the most recent balance sheet that Hwa Tai Industries Berhad had liabilities of RM43.8m falling due within a year, and liabilities of RM1.49m due beyond that. On the other hand, it had cash of RM12.0m and RM22.0m worth of receivables due within a year. So its liabilities total RM11.3m more than the combination of its cash and short-term receivables.

Hwa Tai Industries Berhad has a market capitalization of RM36.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hwa Tai Industries Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hwa Tai Industries Berhad had a loss before interest and tax, and actually shrunk its revenue by 2.1%, to RM73m. That's not what we would hope to see.

Caveat Emptor

Importantly, Hwa Tai Industries Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM969k. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of RM1.9m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Hwa Tai Industries Berhad has 3 warning signs (and 2 which are potentially serious) we think 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.

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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.