Is TSR Capital Berhad (KLSE:TSRCAP) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 TSR Capital Berhad (KLSE:TSRCAP) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TSR Capital Berhad

What Is TSR Capital Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 TSR Capital Berhad had debt of RM27.7m, up from RM26.3m in one year. However, it also had RM3.42m in cash, and so its net debt is RM24.3m.

How Healthy Is TSR Capital Berhad's Balance Sheet?

We can see from the most recent balance sheet that TSR Capital Berhad had liabilities of RM98.4m falling due within a year, and liabilities of RM7.40m due beyond that. Offsetting these obligations, it had cash of RM3.42m as well as receivables valued at RM87.3m due within 12 months. So it has liabilities totalling RM15.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since TSR Capital Berhad has a market capitalization of RM39.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TSR Capital Berhad will need earnings to service that debt. 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.

Over 12 months, TSR Capital Berhad made a loss at the EBIT level, and saw its revenue drop to RM40m, which is a fall of 58%. That makes us nervous, to say the least.

Caveat Emptor

Not only did TSR Capital Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM37m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of RM36m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for TSR Capital Berhad you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.