These 4 Measures Indicate That TIME dotCom Berhad (KLSE:TIMECOM) Is Using Debt Safely

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. We note that TIME dotCom Berhad (KLSE:TIMECOM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TIME dotCom Berhad

What Is TIME dotCom Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that TIME dotCom Berhad had debt of RM124.8m at the end of March 2022, a reduction from RM144.9m over a year. But it also has RM589.8m in cash to offset that, meaning it has RM465.0m net cash.

How Strong Is TIME dotCom Berhad's Balance Sheet?

The latest balance sheet data shows that TIME dotCom Berhad had liabilities of RM368.6m due within a year, and liabilities of RM540.5m falling due after that. Offsetting this, it had RM589.8m in cash and RM562.0m in receivables that were due within 12 months. So it actually has RM242.6m more liquid assets than total liabilities.

This short term liquidity is a sign that TIME dotCom Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Also positive, TIME dotCom Berhad grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TIME dotCom Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, TIME dotCom Berhad produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case TIME dotCom Berhad has RM465.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in RM350m. So we don't think TIME dotCom Berhad's use of debt is risky. 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. For instance, we've identified 1 warning sign for TIME dotCom Berhad that you should be aware of.

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. 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.