Does Talam Transform Berhad (KLSE:TALAMT) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Talam Transform Berhad (KLSE:TALAMT) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Talam Transform Berhad

What Is Talam Transform Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Talam Transform Berhad had RM73.3m in debt in September 2021; about the same as the year before. However, because it has a cash reserve of RM2.73m, its net debt is less, at about RM70.6m.

A Look At Talam Transform Berhad's Liabilities

We can see from the most recent balance sheet that Talam Transform Berhad had liabilities of RM135.9m falling due within a year, and liabilities of RM305.5m due beyond that. Offsetting these obligations, it had cash of RM2.73m as well as receivables valued at RM90.6m due within 12 months. So its liabilities total RM348.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM107.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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 reported revenue of RM44m, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Talam Transform Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM24m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. 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 RM28m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Talam Transform Berhad , and understanding them should be part of your investment process.

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.