TFP Solutions Berhad (KLSE:TFP) Has Debt But No Earnings; Should You Worry?

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.' 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 can see that TFP Solutions Berhad (KLSE:TFP) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for TFP Solutions Berhad

What Is TFP Solutions Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 TFP Solutions Berhad had RM11.2m of debt, an increase on none, over one year. But it also has RM25.1m in cash to offset that, meaning it has RM13.8m net cash.

How Strong Is TFP Solutions Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TFP Solutions Berhad had liabilities of RM13.4m due within 12 months and no liabilities due beyond that. 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.

This excess liquidity suggests that TFP Solutions Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that TFP Solutions Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. 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%. That makes us nervous, to say the least.

So How Risky Is TFP Solutions Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year TFP Solutions Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM3.5m and booked a RM3.7m accounting loss. Given it only has net cash of RM13.8m, the company may need to raise more capital if it doesn't reach break-even 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. 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. We've identified 3 warning signs with TFP Solutions Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

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. 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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