Tek Seng Holdings Berhad (KLSE:TEKSENG) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tek Seng Holdings Berhad (KLSE:TEKSENG) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tek Seng Holdings Berhad

What Is Tek Seng Holdings Berhad's Net Debt?

As you can see below, Tek Seng Holdings Berhad had RM20.0m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has RM69.4m in cash, leading to a RM49.4m net cash position.

How Strong Is Tek Seng Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tek Seng Holdings Berhad had liabilities of RM29.4m due within 12 months and liabilities of RM24.5m due beyond that. Offsetting these obligations, it had cash of RM69.4m as well as receivables valued at RM36.2m due within 12 months. So it can boast RM51.7m more liquid assets than total liabilities.

This surplus suggests that Tek Seng Holdings Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Tek Seng Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Tek Seng Holdings Berhad grew its EBIT by 223% 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 Tek Seng Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tek Seng Holdings 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. During the last two years, Tek Seng Holdings Berhad generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tek Seng Holdings Berhad has net cash of RM49.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in RM28m. When it comes to Tek Seng Holdings Berhad's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Tek Seng Holdings Berhad (of which 1 doesn't sit too well with us!) 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. 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.
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