Does Tanco Holdings Berhad (KLSE:TANCO) Have A 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.' 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. As with many other companies Tanco Holdings Berhad (KLSE:TANCO) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Tanco Holdings Berhad

How Much Debt Does Tanco Holdings Berhad Carry?

As you can see below, Tanco Holdings Berhad had RM40.4m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM7.82m in cash, and so its net debt is RM32.5m.

A Look At Tanco Holdings Berhad's Liabilities

The latest balance sheet data shows that Tanco Holdings Berhad had liabilities of RM99.7m due within a year, and liabilities of RM12.6m falling due after that. Offsetting this, it had RM7.82m in cash and RM39.3m in receivables that were due within 12 months. So its liabilities total RM65.2m more than the combination of its cash and short-term receivables.

Of course, Tanco Holdings Berhad has a market capitalization of RM871.9m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tanco 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.

In the last year Tanco Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 1,225%, to RM64m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Tanco Holdings Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM2.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM11m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Tanco Holdings Berhad that you should be aware of before investing here.

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. 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.