Here’s why Top Glove Corporation Bhd (KLSE: TOPGLOV) can manage its debt responsibly

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. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Top Gant Corporation Bhd. (KLSE: TOPGLOV) is in debt. But does this debt worry shareholders?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

Our analysis indicates that TOPGLOV is potentially undervalued!

How much debt does Top Glove Corporation Bhd have?

You can click on the chart below for historical figures, but it shows that Top Glove Corporation Bhd had debt of RM399.1 million in August 2022, up from RM458.7 million a year prior. But he also has RM950.4 million in cash to make up for that, which means he has a net cash of RM551.3 million.

KLSE:TOPGLOV Debt to Equity History October 31, 2022

How healthy is Top Glove Corporation Bhd’s balance sheet?

The latest balance sheet data shows that Top Glove Corporation Bhd had liabilities of RM941.8 million due within one year, and liabilities of RM318.9 million falling due thereafter. In return, he had RM950.4 million in cash and RM468.7 million in debt due within 12 months. Thus, he can boast of having RM158.5 million more liquid assets than total Passives.

This short-term liquidity is a sign that Top Glove Corporation Bhd could probably repay its debt easily, as its balance sheet is far from stretched. In short, Top Glove Corporation Bhd has clean cash, so it’s fair to say that it doesn’t have a lot of debt!

Fortunately, Top Glove Corporation Bhd’s burden is not too heavy, as its EBIT fell by 96% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Top Glove Corporation Bhd’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Top Glove Corporation Bhd has net cash on its balance sheet, it is always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) this cash balance. Over the past three years, Top Glove Corporation Bhd has produced strong free cash flow equivalent to 67% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Summary

While it is always a good idea to investigate a company’s debt, in this case Top Glove Corporation Bhd has RM551.3 million in net cash and a decent balance sheet. And it impressed us with free cash flow of -RM783m, or 67% of its EBIT. We are therefore not concerned about Top Glove Corporation Bhd’s use of debt. 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. For example, we have identified 2 warning signs for Top Glove Corporation Bhd of which you should be aware.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

Valuation is complex, but we help make it simple.

Find out if Top Gant Corporation Bhd is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

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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