Here's Why Tex Cycle Technology (M) Berhad (KLSE:TEXCYCL) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Tex Cycle Technology (M) Berhad (KLSE:TEXCYCL) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tex Cycle Technology (M) Berhad

What Is Tex Cycle Technology (M) Berhad's Net Debt?

As you can see below, at the end of December 2023, Tex Cycle Technology (M) Berhad had RM32.1m of debt, up from RM28.0m a year ago. Click the image for more detail. However, it does have RM47.2m in cash offsetting this, leading to net cash of RM15.1m.

How Strong Is Tex Cycle Technology (M) Berhad's Balance Sheet?

We can see from the most recent balance sheet that Tex Cycle Technology (M) Berhad had liabilities of RM7.99m falling due within a year, and liabilities of RM30.7m due beyond that. Offsetting these obligations, it had cash of RM47.2m as well as receivables valued at RM16.8m due within 12 months. So it actually has RM25.3m more liquid assets than total liabilities.

This surplus suggests that Tex Cycle Technology (M) Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tex Cycle Technology (M) 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 Tex Cycle Technology (M) Berhad has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tex Cycle Technology (M) 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, a company can only pay off debt with cold hard cash, not accounting profits. Tex Cycle Technology (M) 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 three years, Tex Cycle Technology (M) Berhad saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tex Cycle Technology (M) Berhad has net cash of RM15.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 53% over the last year. So we are not troubled with Tex Cycle Technology (M) Berhad's debt use. 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. Be aware that Tex Cycle Technology (M) Berhad is showing 1 warning sign in our investment analysis , 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.