Would Tomypak Holdings Berhad (KLSE:TOMYPAK) Be Better Off With Less Debt?

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.' 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. Importantly, Tomypak Holdings Berhad (KLSE:TOMYPAK) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that TOMYPAK is potentially overvalued!

What Is Tomypak Holdings Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Tomypak Holdings Berhad had RM62.6m in debt in June 2022; about the same as the year before. On the flip side, it has RM40.5m in cash leading to net debt of about RM22.1m.

How Healthy Is Tomypak Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Tomypak Holdings Berhad had liabilities of RM87.4m falling due within a year, and liabilities of RM8.25m due beyond that. On the other hand, it had cash of RM40.5m and RM64.4m worth of receivables due within a year. So it can boast RM9.23m more liquid assets than total liabilities.

This short term liquidity is a sign that Tomypak Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 Tomypak Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tomypak Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 32%, to RM111m. To be frank that doesn't bode well.

Caveat Emptor

While Tomypak Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM26m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. For instance, we've identified 3 warning signs for Tomypak Holdings Berhad (2 can't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.