Muar Ban Lee Group Berhad (KLSE:MBL) Has A Pretty Healthy Balance Sheet

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. We note that Muar Ban Lee Group Berhad (KLSE:MBL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Muar Ban Lee Group Berhad

What Is Muar Ban Lee Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Muar Ban Lee Group Berhad had debt of RM13.4m, up from RM1.06m in one year. However, it does have RM27.0m in cash offsetting this, leading to net cash of RM13.6m.

A Look At Muar Ban Lee Group Berhad's Liabilities

We can see from the most recent balance sheet that Muar Ban Lee Group Berhad had liabilities of RM93.4m falling due within a year, and liabilities of RM23.7m due beyond that. On the other hand, it had cash of RM27.0m and RM79.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM10.3m.

Given Muar Ban Lee Group Berhad has a market capitalization of RM85.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Muar Ban Lee Group Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Muar Ban Lee Group Berhad's saving grace is its low debt levels, because its EBIT has tanked 59% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Muar Ban Lee Group Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Muar Ban Lee Group 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 three years, Muar Ban Lee Group Berhad produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Muar Ban Lee Group Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM13.6m. And it impressed us with free cash flow of RM12m, being 67% of its EBIT. So we don't have any problem with Muar Ban Lee Group Berhad's use of debt. 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. We've identified 3 warning signs with Muar Ban Lee Group Berhad , and understanding them should be part of your investment process.

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.

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.

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