Is Tien Wah Press Holdings Berhad (KLSE:TIENWAH) Using Too Much 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Tien Wah Press Holdings Berhad (KLSE:TIENWAH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tien Wah Press Holdings Berhad

What Is Tien Wah Press Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Tien Wah Press Holdings Berhad had debt of RM75.2m at the end of March 2021, a reduction from RM138.1m over a year. On the flip side, it has RM23.5m in cash leading to net debt of about RM51.7m.

How Healthy Is Tien Wah Press Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tien Wah Press Holdings Berhad had liabilities of RM86.0m due within 12 months and liabilities of RM67.6m due beyond that. On the other hand, it had cash of RM23.5m and RM90.1m worth of receivables due within a year. So its liabilities total RM40.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Tien Wah Press Holdings Berhad is worth RM131.7m, and thus could probably raise enough capital to shore up 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Tien Wah Press Holdings Berhad has a very low debt to EBITDA ratio of 1.0 so it is strange to see weak interest coverage, with last year's EBIT being only 1.9 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. Notably, Tien Wah Press Holdings Berhad's EBIT launched higher than Elon Musk, gaining a whopping 1,566% on last year. There's no doubt that we learn most about debt from the balance sheet. But it is Tien Wah Press Holdings 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Tien Wah Press Holdings Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, Tien Wah Press Holdings Berhad's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. But the stark truth is that we are concerned by its interest cover. When we consider the range of factors above, it looks like Tien Wah Press Holdings Berhad is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. Be aware that Tien Wah Press Holdings Berhad is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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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