We Think Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) Can Stay On Top Of Its Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Toyo Ventures Holdings Berhad (KLSE:TOYOVEN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out 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 RM9.95m of debt at March 2024, down from RM10.6m a year prior. However, its balance sheet shows it holds RM89.2m in cash, so it actually has RM79.3m net cash.

A Look At Toyo Ventures Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Toyo Ventures Holdings Berhad had liabilities of RM25.3m falling due within a year, and liabilities of RM413.9m due beyond that. Offsetting this, it had RM89.2m in cash and RM132.5m in receivables that were due within 12 months. So it has liabilities totalling RM217.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM140.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Toyo Ventures Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today. Toyo Ventures Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Better yet, Toyo Ventures Holdings Berhad grew its EBIT by 626% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Toyo Ventures 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Toyo Ventures Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM79.3m. And it impressed us with free cash flow of RM80m, being 1,497% 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Toyo Ventures Holdings Berhad (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com