Is Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Toyo Ventures Holdings Berhad

How Much Debt Does Toyo Ventures Holdings Berhad Carry?

As you can see below, at the end of June 2024, Toyo Ventures Holdings Berhad had RM13.9m of debt, up from RM7.34m a year ago. Click the image for more detail. But it also has RM655.7m in cash to offset that, meaning it has RM641.7m net cash.

How Strong 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 RM30.6m falling due within a year, and liabilities of RM716.7m due beyond that. On the other hand, it had cash of RM655.7m and RM125.5m worth of receivables due within a year. So it actually has RM33.9m more liquid assets than total liabilities.

This surplus strongly suggests that Toyo Ventures Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Toyo Ventures Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Toyo Ventures Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 8.3%, to RM79m. We would much prefer see growth.

So How Risky Is Toyo Ventures Holdings Berhad?

Although Toyo Ventures Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM76m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Be aware that Toyo Ventures Holdings Berhad is showing 5 warning signs in our investment analysis , and 2 of those are concerning...

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.