These 4 Measures Indicate That TRC Synergy Berhad (KLSE:TRC) Is Using Debt Extensively

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that TRC Synergy Berhad (KLSE:TRC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for TRC Synergy Berhad

What Is TRC Synergy Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 TRC Synergy Berhad had debt of RM232.4m, up from RM213.4m in one year. However, it does have RM269.8m in cash offsetting this, leading to net cash of RM37.5m.

How Strong Is TRC Synergy Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TRC Synergy Berhad had liabilities of RM556.7m due within 12 months and liabilities of RM150.2m due beyond that. On the other hand, it had cash of RM269.8m and RM388.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM49.1m.

TRC Synergy Berhad has a market capitalization of RM165.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, TRC Synergy Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably TRC Synergy Berhad's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish debt. There's no doubt that we learn most about debt from the balance sheet. But it is TRC Synergy Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While TRC Synergy Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, TRC Synergy 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

Although TRC Synergy Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM37.5m. So while TRC Synergy Berhad does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 4 warning signs for TRC Synergy Berhad (2 are concerning) 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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