Timah Resources (ASX:TML) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Timah Resources Limited (ASX:TML) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Timah Resources

What Is Timah Resources's Debt?

The image below, which you can click on for greater detail, shows that Timah Resources had debt of RM27.9m at the end of June 2022, a reduction from RM30.4m over a year. However, it also had RM7.05m in cash, and so its net debt is RM20.9m.

A Look At Timah Resources' Liabilities

According to the last reported balance sheet, Timah Resources had liabilities of RM912.0k due within 12 months, and liabilities of RM35.8m due beyond 12 months. Offsetting this, it had RM7.05m in cash and RM2.64m in receivables that were due within 12 months. So it has liabilities totalling RM27.0m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM19.5m, we think shareholders really should watch Timah Resources's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Timah Resources 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.

In the last year Timah Resources had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to RM8.6m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Timah Resources produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM259k. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of RM501k. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Timah Resources (of which 2 can't be ignored!) you should know about.

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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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.