Does Teck Guan Perdana Berhad (KLSE:TECGUAN) Have A Healthy Balance Sheet?

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.' 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. We note that Teck Guan Perdana Berhad (KLSE:TECGUAN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Teck Guan Perdana Berhad

What Is Teck Guan Perdana Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Teck Guan Perdana Berhad had debt of RM47.2m at the end of January 2021, a reduction from RM61.1m over a year. But on the other hand it also has RM51.9m in cash, leading to a RM4.62m net cash position.

How Strong Is Teck Guan Perdana Berhad's Balance Sheet?

According to the last reported balance sheet, Teck Guan Perdana Berhad had liabilities of RM53.7m due within 12 months, and liabilities of RM24.3m due beyond 12 months. On the other hand, it had cash of RM51.9m and RM9.08m worth of receivables due within a year. So it has liabilities totalling RM17.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Teck Guan Perdana Berhad has a market capitalization of RM57.3m, 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. Despite its noteworthy liabilities, Teck Guan Perdana 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 Teck Guan Perdana Berhad grew its EBIT by 109% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Teck Guan Perdana 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Teck Guan Perdana 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, Teck Guan Perdana 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 Teck Guan Perdana Berhad does have more liabilities than liquid assets, it also has net cash of RM4.62m. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in RM34m. So is Teck Guan Perdana Berhad's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Teck Guan Perdana Berhad (1 can't be ignored) you should be aware of.

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.

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