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 the risk level of a business, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Ta Win Holdings Berhad (KLSE: TAWIN) uses debt. But does this debt worry shareholders?

What risk does debt entail?

Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.

See our latest analysis for Ta Win Holdings Berhad

What is the net debt of Ta Win Holdings Berhad?

As you can see below, at the end of December 2020, Ta Win Holdings Berhad had RM79.2million in debt, up from RM60.0million a year ago. Click on the image for more details. However, he also had RM35.0million in cash, so his net debt is RM44.2million.

How healthy is Ta Win Holdings Berhad’s balance sheet?

The latest balance sheet data shows Ta Win Holdings Berhad had liabilities of RM 107.3 million due within one year, and liabilities of RM 7.7 million thereafter. On the other hand, he had a cash position of RM 35.0 million and RM 62.3 million in receivables due within one year. Thus, its liabilities total RM17.7 million more than the combination of its cash and short-term receivables.

Considering that Ta Win Holdings Berhad has a market cap of RM 123.6 million, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Ta Win Holdings Berhad that will influence the balance sheet in the future. So if you want to know more about his earnings, it might be worth checking out this chart of his long term profit trend.

Last year, Ta Win Holdings Berhad suffered a loss before interest and taxes and actually reduced its income by 12%, to RM307 million. We would much prefer to see the growth.

Caveat Emptor

While Ta Win Holdings Berhad’s decline in earnings is about as heartwarming as a wet blanket, arguably its earnings before interest and tax losses (EBIT) are even less attractive. His EBIT loss was a whopping RM14m. Consider that, along with the responsibilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. However, the fact that he burned 23 million RM in the last year doesn’t help. So in short, it’s a really risky title. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 4 warning signs we spotted with Ta Win Holdings Berhad (2 of which cannot be ignored).

Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, feel free to check out our exclusive list of cash net growth stocks today.

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