We Think Wee Hur Holdings (SGX:E3B) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. Importantly, Wee Hur Holdings Ltd. (SGX:E3B) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Wee Hur Holdings

What Is Wee Hur Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Wee Hur Holdings had S$107.8m in debt in December 2023; about the same as the year before. But on the other hand it also has S$108.9m in cash, leading to a S$1.07m net cash position.

How Healthy Is Wee Hur Holdings' Balance Sheet?

We can see from the most recent balance sheet that Wee Hur Holdings had liabilities of S$245.4m falling due within a year, and liabilities of S$99.5m due beyond that. Offsetting this, it had S$108.9m in cash and S$120.3m in receivables that were due within 12 months. So its liabilities total S$115.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Wee Hur Holdings is worth S$193.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Wee Hur Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Wee Hur Holdings made a loss at the EBIT level, last year, it was also good to see that it generated S$21m in EBIT over the last twelve months. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Wee Hur Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Wee Hur Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Wee Hur Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of S$1.07m. And it impressed us with free cash flow of S$84m, being 401% of its EBIT. So we are not troubled with Wee Hur Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Wee Hur Holdings has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.