Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) Takes On Some Risk With Its Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 RM7.34m of debt at June 2023, down from RM8.47m a year prior. But it also has RM90.0m in cash to offset that, meaning it has RM82.7m net cash.

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

The latest balance sheet data shows that Toyo Ventures Holdings Berhad had liabilities of RM24.7m due within a year, and liabilities of RM408.5m falling due after that. Offsetting this, it had RM90.0m in cash and RM132.9m in receivables that were due within 12 months. So its liabilities total RM210.3m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM167.1m, we think shareholders really should watch Toyo Ventures Holdings Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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.

We also note that Toyo Ventures Holdings Berhad improved its EBIT from a last year's loss to a positive RM1.9m. There's no doubt that we learn most about debt from the balance sheet. 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. While Toyo Ventures Holdings 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. Happily for any shareholders, Toyo Ventures Holdings Berhad actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Toyo Ventures Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM82.7m. The cherry on top was that in converted 732% of that EBIT to free cash flow, bringing in RM14m. So although we see some areas for improvement, we're not too worried about Toyo Ventures Holdings Berhad's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Toyo Ventures Holdings Berhad (including 1 which is significant) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.