Is W T K Holdings Berhad (KLSE:WTK) Using Too Much 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. As with many other companies W T K Holdings Berhad (KLSE:WTK) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for W T K Holdings Berhad

What Is W T K Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 W T K Holdings Berhad had RM272.7m of debt, an increase on RM226.6m, over one year. However, it does have RM352.5m in cash offsetting this, leading to net cash of RM79.8m.

How Strong Is W T K Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that W T K Holdings Berhad had liabilities of RM173.6m due within 12 months and liabilities of RM214.8m due beyond that. Offsetting this, it had RM352.5m in cash and RM33.3m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to W T K Holdings Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM204.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, W T K Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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 W T K Holdings 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 W T K Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 40%, to RM401m. That makes us nervous, to say the least.

So How Risky Is W T K Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that W T K Holdings Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM29m of cash and made a loss of RM244m. Given it only has net cash of RM79.8m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for W T K Holdings Berhad (of which 1 is concerning!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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