Is Tropicana Corporation Berhad (KLSE:TROP) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Tropicana Corporation Berhad (KLSE:TROP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tropicana Corporation Berhad

How Much Debt Does Tropicana Corporation Berhad Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Tropicana Corporation Berhad had debt of RM4.05b, up from RM3.86b in one year. On the flip side, it has RM670.9m in cash leading to net debt of about RM3.38b.

How Healthy Is Tropicana Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, Tropicana Corporation Berhad had liabilities of RM1.69b due within 12 months, and liabilities of RM4.72b due beyond 12 months. Offsetting these obligations, it had cash of RM670.9m as well as receivables valued at RM812.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM4.92b.

This deficit casts a shadow over the RM1.92b 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, Tropicana Corporation 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 Tropicana Corporation 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.

Over 12 months, Tropicana Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM859m, which is a fall of 26%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Tropicana Corporation Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM419k at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized RM513m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Case in point: We've spotted 3 warning signs for Tropicana Corporation Berhad you should be aware of, and 2 of them make us uncomfortable.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.