David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. 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. We notice that CT Berhad (KLSE:TDM) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. 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. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for TDM Berhad
What is TDM Berhad’s net debt?
As you can see below, at the end of September 2021, TDM Berhad had a debt of RM529.3 million, compared to RM500.4 million a year ago. Click on the image for more details. On the other hand, he has RM173.4 million in cash, resulting in a net debt of around RM355.9 million.
How healthy is TDM Berhad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that TDM Berhad had liabilities of RM338.1m due within 12 months and liabilities of RM728.5m due beyond. On the other hand, it had cash of RM173.4 million and RM77.2 million of receivables due within one year. It therefore has liabilities totaling RM815.9 million more than its cash and short-term receivables, combined.
This deficit casts a shadow over the RM447.9m company, like a towering colossus of mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, TDM Berhad would likely need a major recapitalization if its creditors were to demand repayment.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
While TDM Berhad’s debt to EBITDA ratio (3.5) suggests it uses some debt, its interest coverage is very low at 1.5, suggesting high leverage. It appears that the company is incurring significant depreciation and amortization costs, so perhaps its debt load is heavier than it appears at first glance, since EBITDA is undoubtedly a generous measure benefits. Shareholders should therefore probably be aware that interest charges seem to have had a real impact on the company lately. However, the silver lining was that TDM Berhad achieved a positive EBIT of RM34 million in the last twelve months, an improvement from the previous year’s loss. The balance sheet is clearly the area to focus on when analyzing debt. But it is TDM Berhad’s earnings that will influence the balance sheet going forward. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Over the past year, TDM Berhad has burned a lot of money. While investors no doubt expect a reversal of this situation in due course, it clearly means that its use of debt is more risky.
Our point of view
At first glance, TDM Berhad’s conversion of EBIT to free cash flow left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the busiest night in the world. ‘year. That said, its ability to grow its EBIT is not such a concern. Considering all the above factors, it seems that TDM Berhad has too much debt. While some investors like this kind of risky play, it’s definitely not our cup of tea. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for TDM Berhad (including 2 potentially serious!) that you should be aware of.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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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.