Is WZ Satu Berhad (KLSE:WZSATU) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies WZ Satu Berhad (KLSE:WZSATU) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for WZ Satu Berhad

What Is WZ Satu Berhad's Net Debt?

As you can see below, WZ Satu Berhad had RM90.2m of debt at August 2020, down from RM109.1m a year prior. However, because it has a cash reserve of RM34.7m, its net debt is less, at about RM55.5m.

How Healthy Is WZ Satu Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WZ Satu Berhad had liabilities of RM178.3m due within 12 months and liabilities of RM15.6m due beyond that. Offsetting these obligations, it had cash of RM34.7m as well as receivables valued at RM144.0m due within 12 months. So its liabilities total RM15.2m more than the combination of its cash and short-term receivables.

Given WZ Satu Berhad has a market capitalization of RM99.8m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since WZ Satu 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 WZ Satu Berhad had a loss before interest and tax, and actually shrunk its revenue by 40%, to RM234m. That makes us nervous, to say the least.

Caveat Emptor

Not only did WZ Satu Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM29m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of RM40m into a profit. In the meantime, we consider the stock very risky. 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. Take risks, for example - WZ Satu Berhad has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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. 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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