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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies TIME dotCom Berhad (KLSE:TIMECOM) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.
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 RM59.3m at the end of September 2020, a reduction from RM155.1m over a year. But on the other hand it also has RM648.1m in cash, leading to a RM588.8m net cash position.
How Strong Is TIME dotCom Berhad's Balance Sheet?
The latest balance sheet data shows that TIME dotCom Berhad had liabilities of RM423.9m due within a year, and liabilities of RM438.1m falling due after that. On the other hand, it had cash of RM648.1m and RM534.9m worth of receivables due within a year. So it can boast RM321.0m 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.
Also good is that TIME dotCom Berhad grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TIME dotCom Berhad can strengthen its balance sheet over time. 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. 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 78% 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.
While we empathize with investors who find debt concerning, you should keep in mind that TIME dotCom Berhad has net cash of RM588.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM304m, being 78% 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for TIME dotCom Berhad you should be aware of.
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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