Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Wong Engineering Corporation Berhad (KLSE: WONG) uses debt in his business. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest review for Wong Engineering Corporation Berhad
What is the debt of Wong Engineering Corporation Berhad?
As you can see below, Wong Engineering Corporation Berhad had RM15.2million in debt in July 2021, up from RM17.2million a year earlier. But he also has RM 23.5million in cash to make up for this, which means he has a net cash of RM8.35million.
How strong is Wong Engineering Corporation Berhad’s balance sheet?
According to the latest published balance sheet, Wong Engineering Corporation Berhad had a liability of RM 14.7 million due within 12 months and a liability of RM 13.3 million due beyond 12 months. In return, he had RM 23.5 million in cash and RM 24.4 million in receivables due within 12 months. So he can boast of having 20.0 million RM more in liquid assets than total Liabilities.
This surplus suggests that Wong Engineering Corporation Berhad has a prudent balance sheet and could likely eliminate its debt without too much difficulty. Put simply, the fact that Wong Engineering Corporation Berhad has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, we are happy to report that Wong Engineering Corporation Berhad has increased its EBIT by 76%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious place to start. But you can’t look at debt in isolation; since Wong Engineering Corporation Berhad will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Wong Engineering Corporation Berhad may have net cash on the balance sheet, but it’s always interesting to consider how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs in its ability to manage debt. Fortunately for all shareholders, Wong Engineering Corporation Berhad has actually generated more free cash flow than EBIT over the past three years. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
In summary
While it is always a good idea to investigate a company’s debt, in this case Wong Engineering Corporation Berhad has a net cash position of RM 8.35 million and a decent balance sheet. The icing on the cake was that he converted 104% of that EBIT to free cash flow, earning RM 8.7 million. So is Wong Engineering Corporation Berhad’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Wong Engineering Corporation Berhad you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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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 any stock 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 any of the stocks mentioned.
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