Tambun Indah Land Berhad (KLSE:TAMBUN) Has A Pretty Healthy Balance Sheet

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.' 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 Tambun Indah Land Berhad (KLSE:TAMBUN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tambun Indah Land Berhad

What Is Tambun Indah Land Berhad's Debt?

As you can see below, Tambun Indah Land Berhad had RM116.5m of debt at December 2020, down from RM160.0m a year prior. However, it does have RM57.3m in cash offsetting this, leading to net debt of about RM59.2m.

How Strong Is Tambun Indah Land Berhad's Balance Sheet?

We can see from the most recent balance sheet that Tambun Indah Land Berhad had liabilities of RM35.3m falling due within a year, and liabilities of RM104.2m due beyond that. Offsetting these obligations, it had cash of RM57.3m as well as receivables valued at RM88.8m due within 12 months. So it actually has RM6.57m more liquid assets than total liabilities.

This short term liquidity is a sign that Tambun Indah Land Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a debt to EBITDA ratio of 1.5, Tambun Indah Land Berhad uses debt artfully but responsibly. And the fact that its trailing twelve months of EBIT was 8.4 times its interest expenses harmonizes with that theme. The modesty of its debt load may become crucial for Tambun Indah Land Berhad if management cannot prevent a repeat of the 29% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tambun Indah Land Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Tambun Indah Land Berhad's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Tambun Indah Land Berhad's EBIT growth rate was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we thought its interest cover was a positive. When we consider all the factors mentioned above, we do feel a bit cautious about Tambun Indah Land Berhad's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Tambun Indah Land Berhad you should be aware of.

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. 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.
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