Is Subur Tiasa Holdings Berhad (KLSE:SUBUR) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Subur Tiasa Holdings Berhad (KLSE:SUBUR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Subur Tiasa Holdings Berhad

How Much Debt Does Subur Tiasa Holdings Berhad Carry?

The chart below, which you can click on for greater detail, shows that Subur Tiasa Holdings Berhad had RM667.4m in debt in October 2020; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Subur Tiasa Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Subur Tiasa Holdings Berhad had liabilities of RM606.3m falling due within a year, and liabilities of RM264.3m due beyond that. Offsetting these obligations, it had cash of RM4.44m as well as receivables valued at RM47.3m due within 12 months. So it has liabilities totalling RM818.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM135.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Subur Tiasa Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Subur Tiasa Holdings Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Subur Tiasa Holdings Berhad saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Subur Tiasa Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM6.7m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost RM24m in the last year. So we think buying this stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Subur Tiasa Holdings Berhad (of which 1 makes us a bit uncomfortable!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you decide to trade Subur Tiasa Holdings Berhad, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.