MCE Holdings Berhad (KLSE:MCEHLDG) Could Easily Take On More Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that MCE Holdings Berhad (KLSE:MCEHLDG) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for MCE Holdings Berhad

What Is MCE Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that MCE Holdings Berhad had RM13.3m of debt in July 2023, down from RM20.6m, one year before. However, it does have RM21.0m in cash offsetting this, leading to net cash of RM7.74m.

How Strong Is MCE Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that MCE Holdings Berhad had liabilities of RM29.8m falling due within a year, and liabilities of RM13.8m due beyond that. On the other hand, it had cash of RM21.0m and RM27.7m worth of receivables due within a year. So it actually has RM5.16m more liquid assets than total liabilities.

This surplus suggests that MCE Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, MCE Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that MCE Holdings Berhad grew its EBIT by 116% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MCE Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. MCE Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, MCE Holdings Berhad recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case MCE Holdings Berhad has RM7.74m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 116% over the last year. So is MCE Holdings Berhad's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that MCE Holdings Berhad is showing 3 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.