Is TPC Plus Berhad (KLSE:TPC) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that TPC Plus Berhad (KLSE:TPC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TPC Plus Berhad

What Is TPC Plus Berhad's Debt?

As you can see below, at the end of December 2020, TPC Plus Berhad had RM56.0m of debt, up from RM42.7m a year ago. Click the image for more detail. However, because it has a cash reserve of RM7.04m, its net debt is less, at about RM49.0m.

A Look At TPC Plus Berhad's Liabilities

According to the last reported balance sheet, TPC Plus Berhad had liabilities of RM113.8m due within 12 months, and liabilities of RM22.5m due beyond 12 months. Offsetting these obligations, it had cash of RM7.04m as well as receivables valued at RM53.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM76.2m.

When you consider that this deficiency exceeds the company's RM56.3m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months TPC Plus Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM26m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM6.3m in negative free cash flow over the last year. That means it's on the risky side of things. 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 example, we've discovered 3 warning signs for TPC Plus Berhad (1 is potentially serious!) that you should be aware of before investing here.

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. 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.
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