These 4 Measures Indicate That Tambun Indah Land Berhad (KLSE:TAMBUN) Is Using Debt Safely

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.' 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. Importantly, Tambun Indah Land Berhad (KLSE:TAMBUN) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tambun Indah Land Berhad

What Is Tambun Indah Land Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Tambun Indah Land Berhad had debt of RM106.7m at the end of September 2022, a reduction from RM112.9m over a year. However, it does have RM188.9m in cash offsetting this, leading to net cash of RM82.2m.

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

According to the last reported balance sheet, Tambun Indah Land Berhad had liabilities of RM74.9m due within 12 months, and liabilities of RM82.5m due beyond 12 months. Offsetting these obligations, it had cash of RM188.9m as well as receivables valued at RM113.7m due within 12 months. So it can boast RM145.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Tambun Indah Land Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Tambun Indah Land Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Tambun Indah Land Berhad has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tambun Indah Land Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tambun Indah Land Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Tambun Indah Land Berhad recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tambun Indah Land Berhad has RM82.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM112m, being 83% of its EBIT. The bottom line is that we do not find Tambun Indah Land Berhad's debt levels at all concerning. 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 3 warning signs for Tambun Indah Land Berhad you should be aware of, and 1 of them is significant.

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.