Stock Analysis

Does Top Glove Corporation Bhd (KLSE:TOPGLOV) Have A Healthy Balance Sheet?

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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 can see that Top Glove Corporation Bhd. (KLSE:TOPGLOV) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Top Glove Corporation Bhd

How Much Debt Does Top Glove Corporation Bhd Carry?

The image below, which you can click on for greater detail, shows that at May 2023 Top Glove Corporation Bhd had debt of RM637.5m, up from RM440.8m in one year. But it also has RM987.9m in cash to offset that, meaning it has RM350.4m net cash.

KLSE:TOPGLOV Debt to Equity History September 8th 2023

How Strong Is Top Glove Corporation Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Top Glove Corporation Bhd had liabilities of RM990.9m due within 12 months and liabilities of RM225.3m due beyond that. Offsetting these obligations, it had cash of RM987.9m as well as receivables valued at RM243.5m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Top Glove Corporation Bhd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM6.53b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Top Glove Corporation Bhd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Top Glove Corporation Bhd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Top Glove Corporation Bhd had a loss before interest and tax, and actually shrunk its revenue by 58%, to RM2.8b. To be frank that doesn't bode well.

So How Risky Is Top Glove Corporation Bhd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Top Glove Corporation Bhd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM159m and booked a RM526m accounting loss. With only RM350.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Top Glove Corporation Bhd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Top Glove Corporation Bhd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.