Is TFP Solutions Berhad (KLSE:TFP) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that TFP Solutions Berhad (KLSE:TFP) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TFP Solutions Berhad

What Is TFP Solutions Berhad's Debt?

As you can see below, at the end of September 2020, TFP Solutions Berhad had RM11.2m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has RM25.1m in cash, leading to a RM13.8m net cash position.

A Look At TFP Solutions Berhad's Liabilities

According to the balance sheet data, TFP Solutions Berhad had liabilities of RM13.4m due within 12 months, but no longer term liabilities. Offsetting this, it had RM25.1m in cash and RM3.66m in receivables that were due within 12 months. So it can boast RM15.3m more liquid assets than total liabilities.

It's good to see that TFP Solutions Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, TFP Solutions Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TFP Solutions 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.

Over 12 months, TFP Solutions Berhad made a loss at the EBIT level, and saw its revenue drop to RM31m, which is a fall of 65%. To be frank that doesn't bode well.

So How Risky Is TFP Solutions Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year TFP Solutions Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM3.5m of cash and made a loss of RM3.7m. With only RM13.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with TFP Solutions Berhad (including 1 which is is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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