TRC Synergy Berhad (KLSE:TRC) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that TRC Synergy Berhad (KLSE:TRC) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 TRC Synergy Berhad had debt of RM103.3m at the end of June 2023, a reduction from RM153.9m over a year. But on the other hand it also has RM423.3m in cash, leading to a RM320.0m net cash position.

A Look At TRC Synergy Berhad's Liabilities

According to the last reported balance sheet, TRC Synergy Berhad had liabilities of RM382.6m due within 12 months, and liabilities of RM130.3m due beyond 12 months. On the other hand, it had cash of RM423.3m and RM301.9m worth of receivables due within a year. So it can boast RM212.3m more liquid assets than total liabilities.

This surplus liquidity suggests that TRC Synergy Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that TRC Synergy Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that TRC Synergy Berhad has boosted its EBIT by 82%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine TRC Synergy Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case TRC Synergy Berhad has RM320.0m in net cash and a strong balance sheet. And it impressed us with free cash flow of RM177m, being 355% of its EBIT. At the end of the day we're not concerned about TRC Synergy Berhad's debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for TRC Synergy Berhad (1 is potentially serious) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.