Is Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Toyo Ventures Holdings Berhad

What Is Toyo Ventures Holdings Berhad's Net Debt?

As you can see below, Toyo Ventures Holdings Berhad had RM7.33m of debt at December 2023, down from RM7.94m a year prior. However, it does have RM88.2m in cash offsetting this, leading to net cash of RM80.9m.

How Healthy Is Toyo Ventures Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Toyo Ventures Holdings Berhad had liabilities of RM19.3m falling due within a year, and liabilities of RM413.0m due beyond that. On the other hand, it had cash of RM88.2m and RM132.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM211.4m.

When you consider that this deficiency exceeds the company's RM159.5m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Toyo Ventures Holdings Berhad has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Although Toyo Ventures Holdings Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM5.2m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Toyo Ventures 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. Toyo Ventures Holdings 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. Over the last year, Toyo Ventures Holdings Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Toyo Ventures Holdings Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM80.9m. And it impressed us with free cash flow of RM73m, being 1,401% of its EBIT. So we are not troubled with Toyo Ventures Holdings Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for Toyo Ventures Holdings Berhad (of which 1 is a bit unpleasant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.