Is Tan Chong Motor Holdings Berhad (KLSE:TCHONG) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Tan Chong Motor Holdings Berhad (KLSE:TCHONG) makes use of debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

How Much Debt Does Tan Chong Motor Holdings Berhad Carry?

The chart below, which you can click on for greater detail, shows that Tan Chong Motor Holdings Berhad had RM1.55b in debt in March 2025; about the same as the year before. However, because it has a cash reserve of RM343.1m, its net debt is less, at about RM1.21b.

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

The latest balance sheet data shows that Tan Chong Motor Holdings Berhad had liabilities of RM1.66b due within a year, and liabilities of RM754.8m falling due after that. Offsetting these obligations, it had cash of RM343.1m as well as receivables valued at RM569.3m due within 12 months. So it has liabilities totalling RM1.50b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM514.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tan Chong Motor Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tan Chong Motor Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Check out our latest analysis for Tan Chong Motor Holdings Berhad

In the last year Tan Chong Motor Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 16%, to RM2.1b. That's not what we would hope to see.

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. Indeed, it lost a very considerable RM168m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through RM199m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for Tan Chong Motor Holdings Berhad (of which 1 can't be ignored!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.