Is Tan Chong Motor Holdings Berhad (KLSE:TCHONG) Using Too Much 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, Tan Chong Motor Holdings Berhad (KLSE:TCHONG) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tan Chong Motor Holdings Berhad

What Is Tan Chong Motor Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Tan Chong Motor Holdings Berhad had debt of RM1.71b, up from RM1.57b in one year. However, it does have RM1.02b in cash offsetting this, leading to net debt of about RM690.4m.

How Strong Is Tan Chong Motor Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tan Chong Motor Holdings Berhad had liabilities of RM1.81b due within 12 months and liabilities of RM924.5m due beyond that. Offsetting these obligations, it had cash of RM1.02b as well as receivables valued at RM554.1m due within 12 months. So its liabilities total RM1.16b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM821.8m, we think shareholders really should watch Tan Chong Motor Holdings Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tan Chong Motor Holdings Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Tan Chong Motor Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM3.2b, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While Tan Chong Motor Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM37m. When we look at that alongside the significant liabilities, we're not particularly confident 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 RM97m. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Tan Chong Motor Holdings Berhad has 2 warning signs we think you should be aware of.

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. 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.
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