Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk’. 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 the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
View our latest analysis for Tiong Nam Logistics Holdings Berhad
How Much Debt Does Tiong Nam Logistics Holdings Berhad Carry?
As you can see below, at the end of September 2019, Tiong Nam Logistics Holdings Berhad had RM981.2m of debt, up from RM856.1m a year ago. Click the image for more detail. On the flip side, it has RM26.8m in cash leading to net debt of about RM954.4m.
How Strong Is Tiong Nam Logistics Holdings Berhad’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tiong Nam Logistics Holdings Berhad had liabilities of RM500.3m due within 12 months and liabilities of RM732.9m due beyond that. Offsetting this, it had RM26.8m in cash and RM237.7m in receivables that were due within 12 months. So it has liabilities totalling RM968.7m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the RM209.0m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt. At the end of the day, Tiong Nam Logistics Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment.
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 (11.9), and fairly weak interest coverage, since EBIT is just 0.94 times the interest expense. The debt burden here is substantial. Even worse, Tiong Nam Logistics Holdings Berhad saw its EBIT tank 47% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tiong Nam Logistics Holdings Berhad can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Tiong Nam Logistics Holdings Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Our View
On the face of it, Tiong Nam Logistics Holdings Berhad’s EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its interest cover also fails to instill confidence. Considering everything we’ve mentioned above, it’s fair to say that Tiong Nam Logistics Holdings Berhad is carrying heavy debt load. If you harvest honey without a bee suit, you risk getting stung, so we’d probably stay away from this particular stock. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Case in point: We’ve spotted 2 warning signs for Tiong Nam Logistics Holdings Berhad you should be aware of, and 1 of them makes us a bit uncomfortable.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you spot an error that warrants correction, please contact the editor at [email protected]. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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