Is Topmix Berhad (KLSE:TOPMIX) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Topmix Berhad (KLSE:TOPMIX) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Topmix Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Topmix Berhad had RM24.7m in debt in December 2024; about the same as the year before. However, its balance sheet shows it holds RM30.4m in cash, so it actually has RM5.71m net cash.

A Look At Topmix Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Topmix Berhad had liabilities of RM14.2m due within 12 months and liabilities of RM21.3m due beyond that. Offsetting these obligations, it had cash of RM30.4m as well as receivables valued at RM20.0m due within 12 months. So it can boast RM15.0m more liquid assets than total liabilities.

This surplus suggests that Topmix Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Topmix Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Topmix Berhad

On top of that, Topmix Berhad grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Topmix 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 .

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Topmix 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. Looking at the most recent three years, Topmix Berhad recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Topmix Berhad has net cash of RM5.71m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So we don't think Topmix 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. For example, we've discovered 3 warning signs for Topmix Berhad (1 is a bit concerning!) that you should be aware of before investing here.

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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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.