Is TIME dotCom Berhad (KLSE:TIMECOM) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, TIME dotCom Berhad (KLSE:TIMECOM) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TIME dotCom Berhad

What Is TIME dotCom Berhad's Debt?

The image below, which you can click on for greater detail, shows that TIME dotCom Berhad had debt of RM18.0m at the end of June 2023, a reduction from RM120.3m over a year. However, it does have RM1.58b in cash offsetting this, leading to net cash of RM1.57b.

A Look At TIME dotCom Berhad's Liabilities

The latest balance sheet data shows that TIME dotCom Berhad had liabilities of RM449.2m due within a year, and liabilities of RM548.0m falling due after that. Offsetting this, it had RM1.58b in cash and RM602.6m in receivables that were due within 12 months. So it can boast RM1.19b more liquid assets than total liabilities.

This surplus suggests that TIME dotCom Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that TIME dotCom Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, TIME dotCom Berhad's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TIME dotCom Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While TIME dotCom 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. During the last three years, TIME dotCom Berhad generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TIME dotCom Berhad has net cash of RM1.57b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM310m, being 84% of its EBIT. So is TIME dotCom Berhad's debt a risk? It doesn't seem so to us. 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. Be aware that TIME dotCom Berhad is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.