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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that WCE Holdings Berhad (KLSE:WCEHB) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for WCE Holdings Berhad

How Much Debt Does WCE Holdings Berhad Carry?

As you can see below, at the end of September 2023, WCE Holdings Berhad had RM4.24b of debt, up from RM3.93b a year ago. Click the image for more detail. However, because it has a cash reserve of RM531.9m, its net debt is less, at about RM3.71b.

How Healthy Is WCE Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, WCE Holdings Berhad had liabilities of RM346.4m due within 12 months, and liabilities of RM6.00b due beyond 12 months. Offsetting this, it had RM531.9m in cash and RM139.7m in receivables that were due within 12 months. So it has liabilities totalling RM5.67b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM2.91b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, WCE Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today. 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 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.

Over 12 months, WCE Holdings Berhad reported revenue of RM627m, which is a gain of 5.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months WCE Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM2.9m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM541m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for WCE Holdings Berhad (1 doesn't sit too well with us) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.