Stock Analysis

Is Top Glove Corporation Bhd (KLSE:TOPGLOV) A Risky Investment?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 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.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Top Glove Corporation Bhd

How Much Debt Does Top Glove Corporation Bhd Carry?

As you can see below, at the end of November 2023, Top Glove Corporation Bhd had RM550.4m of debt, up from RM383.0m a year ago. Click the image for more detail. But it also has RM1.00b in cash to offset that, meaning it has RM450.5m net cash.

KLSE:TOPGLOV Debt to Equity History March 1st 2024

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

According to the last reported balance sheet, Top Glove Corporation Bhd had liabilities of RM943.2m due within 12 months, and liabilities of RM201.5m due beyond 12 months. Offsetting this, it had RM1.00b in cash and RM215.1m in receivables that were due within 12 months. So it can boast RM71.3m more liquid assets than total liabilities.

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 RM6.45b 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 54%, to RM2.1b. That makes us nervous, to say the least.

So How Risky Is Top Glove Corporation Bhd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Top Glove Corporation Bhd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM58m and booked a RM815m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of RM450.5m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Top Glove Corporation Bhd I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.