Techbond Group Berhad (KLSE:TECHBND) Has A Rock Solid Balance Sheet

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.' 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 Techbond Group Berhad (KLSE:TECHBND) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Techbond Group Berhad

What Is Techbond Group Berhad's Debt?

As you can see below, Techbond Group Berhad had RM9.36m of debt at March 2024, down from RM27.7m a year prior. However, its balance sheet shows it holds RM24.4m in cash, so it actually has RM15.1m net cash.

How Strong Is Techbond Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Techbond Group Berhad had liabilities of RM16.0m due within 12 months and liabilities of RM17.7m due beyond that. Offsetting these obligations, it had cash of RM24.4m as well as receivables valued at RM34.6m due within 12 months. So it actually has RM25.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Techbond Group Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Techbond Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Techbond Group Berhad grew its EBIT by 200% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Techbond Group Berhad'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Techbond Group Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Techbond Group Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Techbond Group Berhad has RM15.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM16m, being 127% of its EBIT. So we don't think Techbond Group Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 4 warning signs for Techbond Group Berhad you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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