These 4 Measures Indicate That TAS Offshore Berhad (KLSE:TAS) Is Using Debt Reasonably Well

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, TAS Offshore Berhad (KLSE:TAS) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for TAS Offshore Berhad

What Is TAS Offshore Berhad's Debt?

The image below, which you can click on for greater detail, shows that at May 2023 TAS Offshore Berhad had debt of RM7.56m, up from RM6.60m in one year. However, it does have RM22.2m in cash offsetting this, leading to net cash of RM14.6m.

How Healthy Is TAS Offshore Berhad's Balance Sheet?

According to the last reported balance sheet, TAS Offshore Berhad had liabilities of RM53.5m due within 12 months, and liabilities of RM3.76m due beyond 12 months. Offsetting this, it had RM22.2m in cash and RM22.7m in receivables that were due within 12 months. So its liabilities total RM12.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since TAS Offshore Berhad has a market capitalization of RM45.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, TAS Offshore Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although TAS Offshore Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM17m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TAS Offshore Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, TAS Offshore Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While TAS Offshore Berhad does have more liabilities than liquid assets, it also has net cash of RM14.6m. So we don't have any problem with TAS Offshore Berhad's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for TAS Offshore Berhad (of which 1 is a bit unpleasant!) you should know about.

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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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.