Thong Guan Industries Berhad (KLSE:TGUAN) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Thong Guan Industries Berhad (KLSE:TGUAN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Thong Guan Industries Berhad

How Much Debt Does Thong Guan Industries Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Thong Guan Industries Berhad had RM155.4m of debt, an increase on RM140.5m, over one year. However, it does have RM285.7m in cash offsetting this, leading to net cash of RM130.2m.

A Look At Thong Guan Industries Berhad's Liabilities

According to the last reported balance sheet, Thong Guan Industries Berhad had liabilities of RM251.1m due within 12 months, and liabilities of RM74.2m due beyond 12 months. Offsetting these obligations, it had cash of RM285.7m as well as receivables valued at RM216.8m due within 12 months. So it actually has RM177.1m more liquid assets than total liabilities.

This surplus suggests that Thong Guan Industries 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, Thong Guan Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Thong Guan Industries Berhad has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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 Thong Guan Industries 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. Thong Guan Industries 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. In the last three years, Thong Guan Industries Berhad's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Thong Guan Industries Berhad has net cash of RM130.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So we don't think Thong Guan Industries Berhad's use of debt is risky. 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 2 warning signs for Thong Guan Industries Berhad 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.

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