We Think PWF Corporation Bhd (KLSE:PWF) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, PWF Corporation Bhd. (KLSE:PWF) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for PWF Corporation Bhd

What Is PWF Corporation Bhd's Net Debt?

As you can see below, PWF Corporation Bhd had RM107.6m of debt at September 2023, down from RM133.5m a year prior. However, it does have RM11.6m in cash offsetting this, leading to net debt of about RM96.0m.

How Strong Is PWF Corporation Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PWF Corporation Bhd had liabilities of RM115.1m due within 12 months and liabilities of RM63.2m due beyond that. Offsetting this, it had RM11.6m in cash and RM41.8m in receivables that were due within 12 months. So it has liabilities totalling RM125.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because PWF Corporation Bhd is worth RM255.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since PWF Corporation Bhd 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.

Over 12 months, PWF Corporation Bhd reported revenue of RM560m, which is a gain of 22%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate PWF Corporation Bhd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost RM1.3m at the EBIT level. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of RM31m and the profit of RM32m. So one might argue that there's still a chance it can get things on the right track. 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. For instance, we've identified 4 warning signs for PWF Corporation Bhd that you should be aware of.

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.