TRC Synergy Berhad (KLSE:TRC) Could Easily Take On More 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. Importantly, TRC Synergy Berhad (KLSE:TRC) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Debt?

The image below, which you can click on for greater detail, shows that TRC Synergy Berhad had debt of RM99.1m at the end of September 2023, a reduction from RM147.1m over a year. However, its balance sheet shows it holds RM421.4m in cash, so it actually has RM322.3m net cash.

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 RM346.1m due within 12 months and liabilities of RM124.7m due beyond that. On the other hand, it had cash of RM421.4m and RM255.3m worth of receivables due within a year. So it can boast RM205.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that TRC Synergy Berhad's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, TRC Synergy Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that TRC Synergy Berhad grew its EBIT by 235% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TRC Synergy Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. TRC Synergy 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. Happily for any shareholders, TRC Synergy Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case TRC Synergy Berhad has RM322.3m in net cash and a strong balance sheet. The cherry on top was that in converted 383% of that EBIT to free cash flow, bringing in RM189m. At the end of the day we're not concerned about TRC Synergy Berhad's 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. We've identified 3 warning signs with TRC Synergy Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

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.