TalkMed Group (SGX:5G3) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies TalkMed Group Limited (SGX:5G3) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for TalkMed Group

How Much Debt Does TalkMed Group Carry?

The image below, which you can click on for greater detail, shows that at June 2024 TalkMed Group had debt of S$4.23m, up from S$2.74m in one year. However, its balance sheet shows it holds S$85.7m in cash, so it actually has S$81.4m net cash.

How Healthy Is TalkMed Group's Balance Sheet?

According to the last reported balance sheet, TalkMed Group had liabilities of S$24.0m due within 12 months, and liabilities of S$4.10m due beyond 12 months. On the other hand, it had cash of S$85.7m and S$5.50m worth of receivables due within a year. So it actually has S$63.0m more liquid assets than total liabilities.

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

On the other hand, TalkMed Group's EBIT dived 18%, 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 TalkMed Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. TalkMed Group 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 last three years, TalkMed Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TalkMed Group has net cash of S$81.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of S$34m, being 101% of its EBIT. So we don't think TalkMed Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for TalkMed Group (1 can't be ignored!) that you should be aware of before investing here.

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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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.