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.' 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 note that PWF Corporation Bhd. (KLSE:PWF) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does PWF Corporation Bhd Carry?
As you can see below, at the end of September 2020, PWF Corporation Bhd had RM153.5m of debt, up from RM141.1m a year ago. Click the image for more detail. On the flip side, it has RM16.1m in cash leading to net debt of about RM137.4m.
A Look At PWF Corporation Bhd's Liabilities
Zooming in on the latest balance sheet data, we can see that PWF Corporation Bhd had liabilities of RM148.3m due within 12 months and liabilities of RM66.4m due beyond that. Offsetting this, it had RM16.1m in cash and RM35.2m in receivables that were due within 12 months. So its liabilities total RM163.4m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the RM104.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, PWF Corporation Bhd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is PWF Corporation Bhd'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 PWF Corporation Bhd had a loss before interest and tax, and actually shrunk its revenue by 14%, to RM318m. That's not what we would hope to see.
While PWF Corporation Bhd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM4.2m. 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. Not least because it burned through RM8.6m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that PWF Corporation Bhd is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...
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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