Is MCE Holdings Berhad (KLSE:MCEHLDG) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that MCE Holdings Berhad (KLSE:MCEHLDG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for MCE Holdings Berhad

What Is MCE Holdings Berhad's Debt?

As you can see below, MCE Holdings Berhad had RM12.4m of debt at January 2024, down from RM19.2m a year prior. However, it does have RM39.9m in cash offsetting this, leading to net cash of RM27.5m.

How Healthy Is MCE Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that MCE Holdings Berhad had liabilities of RM35.2m falling due within a year, and liabilities of RM13.2m due beyond that. Offsetting these obligations, it had cash of RM39.9m as well as receivables valued at RM23.2m due within 12 months. So it can boast RM14.7m more liquid assets than total liabilities.

This short term liquidity is a sign that MCE Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, MCE Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, MCE Holdings Berhad grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since MCE Holdings Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MCE Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, MCE Holdings Berhad generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MCE Holdings Berhad has net cash of RM27.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM35m, being 82% of its EBIT. So we don't think MCE Holdings Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with MCE Holdings Berhad .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.