Ta Ann Holdings Berhad (KLSE:TAANN) Seems To Use Debt Rather Sparingly

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. As with many other companies Ta Ann Holdings Berhad (KLSE:TAANN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Ta Ann Holdings Berhad

What Is Ta Ann Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ta Ann Holdings Berhad had RM334.7m of debt in June 2022, down from RM416.0m, one year before. However, it does have RM503.1m in cash offsetting this, leading to net cash of RM168.5m.

A Look At Ta Ann Holdings Berhad's Liabilities

According to the last reported balance sheet, Ta Ann Holdings Berhad had liabilities of RM488.0m due within 12 months, and liabilities of RM410.9m due beyond 12 months. Offsetting these obligations, it had cash of RM503.1m as well as receivables valued at RM69.6m due within 12 months. So its liabilities total RM326.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Ta Ann Holdings Berhad is worth RM1.41b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Ta Ann Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Ta Ann Holdings Berhad grew its EBIT by 156% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ta Ann Holdings Berhad 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ta Ann Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Ta Ann Holdings Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Ta Ann Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM168.5m. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in RM498m. So is Ta Ann Holdings Berhad's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Ta Ann Holdings Berhad has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.