Is TAS Offshore Berhad (KLSE:TAS) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies TAS Offshore Berhad (KLSE:TAS) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TAS Offshore Berhad

How Much Debt Does TAS Offshore Berhad Carry?

As you can see below, TAS Offshore Berhad had RM15.1m of debt at November 2020, down from RM21.5m a year prior. However, because it has a cash reserve of RM1.16m, its net debt is less, at about RM13.9m.

How Healthy Is TAS Offshore Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TAS Offshore Berhad had liabilities of RM26.7m due within 12 months and liabilities of RM11.5m due beyond that. Offsetting these obligations, it had cash of RM1.16m as well as receivables valued at RM11.5m due within 12 months. So its liabilities total RM25.5m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM42.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is TAS Offshore Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, TAS Offshore Berhad made a loss at the EBIT level, and saw its revenue drop to RM9.7m, which is a fall of 61%. To be frank that doesn't bode well.

Caveat Emptor

While TAS Offshore 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 RM81m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM20m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for TAS Offshore Berhad (1 shouldn't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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