Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Berhad White Horse (KLSE: WTHORSE) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for White Horse Berhad
How much debt does White Horse Berhad carry?
The image below, which you can click for more details, shows White Horse Berhad owed RM82.1million in debt at the end of June 2021, a reduction from RM128.3million on a year. But he also has RM 113.1 million in cash to make up for this, which means he has a net cash position of RM 31.0 million.
Is White Horse Berhad’s track record healthy?
According to the latest published balance sheet, White Horse Berhad had liabilities of RM 171.5 million due within 12 months and RM 29.1 million liabilities due beyond 12 months. On the other hand, he had a cash position of RM 113.1 million and RM 82.2 million of receivables due within one year. Thus, its liabilities are RM 5.30 million more than the combination of its cash and short-term receivables.
Considering that the listed shares of White Horse Berhad are worth a total of RM 158.8 million, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite her notable liabilities, White Horse Berhad has a net cash flow, so it’s fair to say that she doesn’t have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But it is the earnings of White Horse Berhad that will influence the way the balance sheet looks in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Over the past year, White Horse Berhad has not been profitable on EBIT level, but has managed to increase its turnover by 7.3%, to RM 453 million. We generally like to see unprofitable businesses growing faster, but each in their own way.
So how risky is White Horse Berhad?
Although White Horse Berhad recorded a loss of profit before interest and taxes (EBIT) in the last twelve months, it generated positive free cash flow of RM78 million. So taking this at face value and considering the net cash position, we don’t think the security is too risky in the short term. With uninspiring revenue growth, we would really need to see positive EBIT before we can gather much enthusiasm for this business. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for White Horse Berhad (of which 1 is significant!) that you should know.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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