Muar Ban Lee Group Berhad (KLSE:MBL) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Muar Ban Lee Group Berhad (KLSE:MBL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Muar Ban Lee Group Berhad

What Is Muar Ban Lee Group Berhad's Debt?

As you can see below, at the end of September 2024, Muar Ban Lee Group Berhad had RM11.7m of debt, up from RM6.21m a year ago. Click the image for more detail. However, it does have RM41.5m in cash offsetting this, leading to net cash of RM29.8m.

How Strong Is Muar Ban Lee Group Berhad's Balance Sheet?

According to the last reported balance sheet, Muar Ban Lee Group Berhad had liabilities of RM78.7m due within 12 months, and liabilities of RM12.8m due beyond 12 months. Offsetting this, it had RM41.5m in cash and RM89.2m in receivables that were due within 12 months. So it actually has RM39.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Muar Ban Lee Group Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Muar Ban Lee Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Muar Ban Lee Group Berhad grew its EBIT by 98% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Muar Ban Lee Group Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Muar Ban Lee Group 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. In the last three years, Muar Ban Lee Group Berhad created free cash flow amounting to 6.3% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Muar Ban Lee Group Berhad has net cash of RM29.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 98% year-on-year EBIT growth. So we don't think Muar Ban Lee Group Berhad's use of debt is risky. 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 Muar Ban Lee Group Berhad is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

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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.