Is Wee Hur Holdings (SGX:E3B) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Wee Hur Holdings Ltd. (SGX:E3B) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Wee Hur Holdings

How Much Debt Does Wee Hur Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Wee Hur Holdings had S$628.1m of debt, an increase on S$348.9m, over one year. However, because it has a cash reserve of S$108.2m, its net debt is less, at about S$520.0m.

How Strong 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$115.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$592.6m.

This deficit casts a shadow over the S$188.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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 you can't view debt in total isolation; since Wee Hur Holdings 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, Wee Hur Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Wee Hur Holdings had an earnings before interest and tax (EBIT) loss over the last year. 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. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized S$74m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Wee Hur Holdings you should be aware of, and 1 of them doesn't sit too well with us.

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.

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