Is TA (SGX:PA3) weighed down by its debt?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Mostly, TA Corporation Ltd (SGX:PA3) is in debt. But the real question is whether this debt makes the business risky.

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

See our latest analysis for TA

What is TA’s net debt?

The image below, which you can click on for more details, shows that TA had a debt of S$378.1 million at the end of December 2021, a reduction from S$419.0 million year-on-year . However, he also had S$76.4 million in cash, so his net debt is S$301.7 million.

SGX: PA3 Debt to Equity April 8, 2022

How strong is TA’s balance sheet?

The latest balance sheet data shows that TA had liabilities of S$439.0 million due within one year, and liabilities of S$261.3 million falling due thereafter. In return, he had S$76.4 million in cash and S$83.2 million in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of S$540.7 million.

This deficit casts a shadow over the 32.6 million Singaporean company, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. After all, TA would likely need a major recapitalization if it had to pay its creditors today. The balance sheet is clearly the area to focus on when analyzing debt. But it is TA’s earnings that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Over 12 months, TA reported revenue of S$218 million, a 35% gain, although it reported no earnings before interest and tax. The shareholders probably have their fingers crossed that she can make a profit.

Caveat Emptor

While we can certainly appreciate TA’s revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. Its EBIT loss was S$14 million. Reflecting on that and the large total liabilities, it’s hard to know what to say about the action due to our intense disaffinity for it. Of course, the company might have a great story about how it’s heading towards a brighter future. But the reality is that it lacks liquid assets compared to liabilities and lost S$29 million last year. We therefore believe that buying these shares is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that TA displays 3 warning signs in our investment analysis and 2 of them are a little concerning…

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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