Is Talam Transform Berhad (KLSE:TALAMT) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Talam Transform Berhad (KLSE:TALAMT) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Talam Transform Berhad

What Is Talam Transform Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Talam Transform Berhad had RM31.6m of debt in March 2023, down from RM72.5m, one year before. However, because it has a cash reserve of RM7.18m, its net debt is less, at about RM24.5m.

A Look At Talam Transform Berhad's Liabilities

We can see from the most recent balance sheet that Talam Transform Berhad had liabilities of RM134.7m falling due within a year, and liabilities of RM259.4m due beyond that. Offsetting these obligations, it had cash of RM7.18m as well as receivables valued at RM39.6m due within 12 months. So it has liabilities totalling RM347.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM64.4m 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'd watch its balance sheet closely, without a doubt. After all, Talam Transform Berhad would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Talam Transform Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Talam Transform Berhad made a loss at the EBIT level, and saw its revenue drop to RM61m, which is a fall of 7.7%. That's not what we would hope to see.

Caveat Emptor

Importantly, Talam Transform Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM425k at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of RM16m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. For instance, we've identified 3 warning signs for Talam Transform Berhad (2 make us uncomfortable) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.