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

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TWL Holdings Berhad

What Is TWL Holdings Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that TWL Holdings Berhad had RM10.8m in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds RM94.3m in cash, so it actually has RM83.5m net cash.

How Strong Is TWL Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that TWL Holdings Berhad had liabilities of RM8.80m falling due within a year, and liabilities of RM9.57m due beyond that. On the other hand, it had cash of RM94.3m and RM61.1m worth of receivables due within a year. So it can boast RM137.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that TWL Holdings Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, TWL Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is TWL Holdings 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 TWL Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to RM33m. With any luck the company will be able to grow its way to profitability.

So How Risky Is TWL Holdings Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months TWL Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM22m and booked a RM21m accounting loss. With only RM83.5m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, TWL Holdings Berhad may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 4 warning signs with TWL Holdings Berhad (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.