Here's Why Tiong Nam Logistics Holdings Berhad (KLSE:TNLOGIS) Is Weighed Down By Its Debt Load

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Tiong Nam Logistics Holdings Berhad (KLSE:TNLOGIS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tiong Nam Logistics Holdings Berhad

What Is Tiong Nam Logistics Holdings Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Tiong Nam Logistics Holdings Berhad had RM969.0m in debt in December 2020; about the same as the year before. On the flip side, it has RM69.5m in cash leading to net debt of about RM899.5m.

How Strong Is Tiong Nam Logistics Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Tiong Nam Logistics Holdings Berhad had liabilities of RM412.6m due within 12 months, and liabilities of RM869.6m due beyond 12 months. On the other hand, it had cash of RM69.5m and RM212.7m worth of receivables due within a year. So it has liabilities totalling RM1.00b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM434.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Tiong Nam Logistics Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Tiong Nam Logistics Holdings Berhad shareholders face the double whammy of a high net debt to EBITDA ratio (9.9), and fairly weak interest coverage, since EBIT is just 1.2 times the interest expense. The debt burden here is substantial. On a slightly more positive note, Tiong Nam Logistics Holdings Berhad grew its EBIT at 12% 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 it is future earnings, more than anything, that will determine Tiong Nam Logistics Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Tiong Nam Logistics Holdings Berhad reported free cash flow worth 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

To be frank both Tiong Nam Logistics Holdings Berhad's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. After considering the datapoints discussed, we think Tiong Nam Logistics Holdings Berhad has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Tiong Nam Logistics Holdings Berhad (of which 1 is potentially serious!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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