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. As with many other companies TPC Plus Berhad (KLSE:TPC) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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.
What Is TPC Plus Berhad's Debt?
The image below, which you can click on for greater detail, shows that at September 2021 TPC Plus Berhad had debt of RM56.6m, up from RM53.3m in one year. However, because it has a cash reserve of RM4.37m, its net debt is less, at about RM52.2m.
How Strong Is TPC Plus Berhad's Balance Sheet?
The latest balance sheet data shows that TPC Plus Berhad had liabilities of RM134.9m due within a year, and liabilities of RM17.1m falling due after that. On the other hand, it had cash of RM4.37m and RM67.0m worth of receivables due within a year. So it has liabilities totalling RM80.7m more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of RM61.6m, we think shareholders really should watch TPC Plus Berhad's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is TPC Plus 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.
In the last year TPC Plus Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to RM277m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months TPC Plus Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM40m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through RM9.8m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that TPC Plus Berhad is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.