Is Wee Hur Holdings (SGX:E3B) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Wee Hur Holdings Ltd. (SGX:E3B) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wee Hur Holdings

How Much Debt Does Wee Hur Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Wee Hur Holdings had debt of S$484.5m, up from S$348.9m in one year. However, because it has a cash reserve of S$108.2m, its net debt is less, at about S$376.4m.

How Healthy Is Wee Hur Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wee Hur Holdings had liabilities of S$275.5m due within 12 months and liabilities of S$541.2m due beyond that. Offsetting this, it had S$108.2m in cash and S$124.9m in receivables that were due within 12 months. So its liabilities total S$583.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the S$183.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Wee Hur Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Wee Hur Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Wee Hur Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Wee Hur Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at S$2.5m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized S$82m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Wee Hur Holdings (including 1 which is concerning) .

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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