Does WCE Holdings Berhad (KLSE:WCEHB) Have A Healthy Balance Sheet?

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.' 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. We note that WCE Holdings Berhad (KLSE:WCEHB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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.

Check out our latest analysis for WCE Holdings Berhad

What Is WCE Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 WCE Holdings Berhad had RM3.23b of debt, an increase on RM3.10b, over one year. However, because it has a cash reserve of RM616.6m, its net debt is less, at about RM2.61b.

How Strong Is WCE Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WCE Holdings Berhad had liabilities of RM331.6m due within 12 months and liabilities of RM4.27b due beyond that. On the other hand, it had cash of RM616.6m and RM39.0m worth of receivables due within a year. So it has liabilities totalling RM3.95b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM788.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, WCE Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

WCE Holdings Berhad shareholders face the double whammy of a high net debt to EBITDA ratio (207), and fairly weak interest coverage, since EBIT is just 0.08 times the interest expense. This means we'd consider it to have a heavy debt load. However, the silver lining was that WCE Holdings Berhad achieved a positive EBIT of RM12m in the last twelve months, an improvement on the prior year's loss. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since WCE 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, WCE Holdings Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both WCE Holdings Berhad's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. Having said that, its ability to grow its EBIT isn't such a worry. It's also worth noting that WCE Holdings Berhad is in the Infrastructure industry, which is often considered to be quite defensive. Taking into account all the aforementioned factors, it looks like WCE Holdings Berhad has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. For example, we've discovered 3 warning signs for WCE Holdings Berhad (2 can't be ignored!) that you should be aware of before investing here.

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. 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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