Is Teo Guan Lee Corporation Berhad (KLSE:TGL) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Teo Guan Lee Corporation Berhad (KLSE:TGL) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 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 Teo Guan Lee Corporation Berhad

How Much Debt Does Teo Guan Lee Corporation Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Teo Guan Lee Corporation Berhad had debt of RM12.1m, up from RM8.57m in one year. But on the other hand it also has RM37.1m in cash, leading to a RM24.9m net cash position.

A Look At Teo Guan Lee Corporation Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Teo Guan Lee Corporation Berhad had liabilities of RM19.6m due within 12 months and liabilities of RM8.72m due beyond that. On the other hand, it had cash of RM37.1m and RM20.1m worth of receivables due within a year. So it can boast RM28.8m more liquid assets than total liabilities.

This surplus strongly suggests that Teo Guan Lee Corporation Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Teo Guan Lee Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Teo Guan Lee Corporation Berhad if management cannot prevent a repeat of the 34% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Teo Guan Lee Corporation 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Teo Guan Lee Corporation Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Teo Guan Lee Corporation Berhad's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Teo Guan Lee Corporation Berhad has net cash of RM24.9m, as well as more liquid assets than liabilities. So we don't have any problem with Teo Guan Lee Corporation Berhad's use of debt. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Teo Guan Lee Corporation Berhad you should know about.

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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