Is Top Glove Corporation Bhd (KLSE:TOPGLOV) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Top Glove Corporation Bhd. (KLSE:TOPGLOV) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Top Glove Corporation Bhd

What Is Top Glove Corporation Bhd's Debt?

As you can see below, Top Glove Corporation Bhd had RM398.0m of debt at August 2024, down from RM554.5m a year prior. However, it does have RM1.00b in cash offsetting this, leading to net cash of RM602.3m.

A Look At Top Glove Corporation Bhd's Liabilities

According to the last reported balance sheet, Top Glove Corporation Bhd had liabilities of RM934.7m due within 12 months, and liabilities of RM171.2m due beyond 12 months. Offsetting this, it had RM1.00b in cash and RM379.2m in receivables that were due within 12 months. So it actually has RM273.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Top Glove Corporation Bhd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Top Glove Corporation Bhd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Top Glove Corporation Bhd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Top Glove Corporation Bhd wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to RM2.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

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 the fact is that over the last twelve months Top Glove Corporation Bhd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM98m of cash and made a loss of RM62m. But the saving grace is the RM602.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Top Glove Corporation Bhd you should know about.

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.