Does Teck Guan Perdana Berhad (KLSE: TECGUAN) have a healthy track record?
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 risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We notice that Teak Guan Perdana Berhad (KLSE: TECGUAN) has debt on its balance sheet. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is Teck Guan Perdana Berhad’s net debt?
The image below, which you can click for more details, shows that Teck Guan Perdana Berhad had a debt of RM 47.2 million at the end of January 2021, a reduction from $ 61.1 million. RM over one year. But on the other hand, he also has RM 51.9 million in cash, which leads to a net cash position of RM 4.62 million.
How strong is Teck Guan Perdana Berhad’s balance sheet?
According to the latest published balance sheet, Teck Guan Perdana Berhad had liabilities of RM 53.7 million due within 12 months and liabilities of RM 24.3 million due beyond 12 months. On the other hand, he had cash of RM 51.9 million and RM 9.08 million of receivables due within one year. So he has a liability totaling RM 17.0 million more than his cash and short-term receivables combined.
While that might sound like a lot, it’s not that bad since Teck Guan Perdana Berhad has a market cap of RM57.3million, so he could likely strengthen his balance sheet by raising capital if he had to. But we absolutely want to keep our eyes open for indications that its debt is too risky. Despite his notable liabilities, Teck Guan Perdana Berhad has a net cash flow, so it’s fair to say that he doesn’t have a heavy debt load!
Even more impressive was the fact that Teck Guan Perdana Berhad increased its EBIT by 109% year over year. If sustained, this growth will make debt even more manageable in the years to come. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Teck Guan Perdana Berhad will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Finally, a business can only pay off its debt with hard cash, not with book profits. Teck Guan Perdana Berhad may have net cash on the balance sheet, but it’s always interesting to look at how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs in its ability to manage debt. In the past three years, Teck Guan Perdana Berhad has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Although Teck Guan Perdana Berhad has more liabilities than liquid assets, it also has net cash of RM 4.62 million. The icing on the cake was that he converted 103% of that EBIT into free cash flow, earning RM 34 million. So is Teck Guan Perdana Berhad’s debt a risk? It does not seem to us. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, every business can contain risks that exist off the balance sheet. For example, we have identified 3 warning signs for Teck Guan Perdana Berhad (1 cannot be ignored) you must be aware.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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