TIME dotCom Berhad (KLSE:TIMECOM) Seems To Use Debt Rather Sparingly

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 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?

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. 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. 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. 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?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 TIME dotCom Berhad had RM141.3m of debt, an increase on RM60.3m, over one year. But it also has RM747.7m in cash to offset that, meaning it has RM606.4m net cash.

How Strong Is TIME dotCom Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TIME dotCom Berhad had liabilities of RM411.8m due within 12 months and liabilities of RM560.6m due beyond that. Offsetting these obligations, it had cash of RM747.7m as well as receivables valued at RM533.1m due within 12 months. So it can boast RM308.4m 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. Succinctly put, TIME dotCom Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that TIME dotCom Berhad grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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.

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. Over the most recent three years, TIME dotCom Berhad recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case TIME dotCom Berhad has RM606.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM399m, being 72% of its EBIT. So we don't think TIME dotCom Berhad's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of TIME dotCom Berhad's earnings per share history for free.

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.

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.

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