Tanco Holdings Berhad (KLSE:TANCO) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Tanco Holdings Berhad (KLSE:TANCO) makes use of 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tanco Holdings Berhad

What Is Tanco Holdings Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Tanco Holdings Berhad had RM50.6m in debt in December 2020; about the same as the year before. However, it also had RM2.28m in cash, and so its net debt is RM48.3m.

A Look At Tanco Holdings Berhad's Liabilities

The latest balance sheet data shows that Tanco Holdings Berhad had liabilities of RM69.3m due within a year, and liabilities of RM43.9m falling due after that. Offsetting these obligations, it had cash of RM2.28m as well as receivables valued at RM3.24m due within 12 months. So it has liabilities totalling RM107.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM58.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Tanco Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. 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 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 11%, to RM2.6m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Tanco Holdings Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM13m. 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 burned through RM5.9m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 6 warning signs for Tanco Holdings Berhad (4 are a bit unpleasant!) 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. 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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