Is Tanco Holdings Berhad (KLSE:TANCO) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tanco Holdings Berhad (KLSE:TANCO) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tanco Holdings Berhad

What Is Tanco Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Tanco Holdings Berhad had RM50.2m of debt in September 2020, down from RM52.6m, one year before. On the flip side, it has RM3.71m in cash leading to net debt of about RM46.5m.

A Look At Tanco Holdings Berhad's Liabilities

The latest balance sheet data shows that Tanco Holdings Berhad had liabilities of RM68.6m due within a year, and liabilities of RM44.0m falling due after that. Offsetting this, it had RM3.71m in cash and RM3.06m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM105.8m.

The deficiency here weighs heavily on the RM51.2m 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, Tanco Holdings 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 it is Tanco Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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, Tanco Holdings Berhad reported revenue of RM3.8m, which is a gain of 80%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Tanco Holdings Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM12m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM7.5m over the last twelve months. So suffice it to say we consider the stock to be 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. To that end, you should learn about the 6 warning signs we've spotted with Tanco Holdings Berhad (including 4 which make us uncomfortable) .

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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