Is Minox International Group Berhad (KLSE:MINOX) A Risky Investment?

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 Minox International Group Berhad (KLSE:MINOX) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Minox International Group Berhad

How Much Debt Does Minox International Group Berhad Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Minox International Group Berhad had debt of RM29.3m, up from RM22.2m in one year. However, it does have RM32.0m in cash offsetting this, leading to net cash of RM2.74m.

A Look At Minox International Group Berhad's Liabilities

We can see from the most recent balance sheet that Minox International Group Berhad had liabilities of RM15.0m falling due within a year, and liabilities of RM21.5m due beyond that. On the other hand, it had cash of RM32.0m and RM10.1m worth of receivables due within a year. So it actually has RM5.58m more liquid assets than total liabilities.

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

In fact Minox International Group Berhad's saving grace is its low debt levels, because its EBIT has tanked 22% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Minox International Group Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Minox International 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. Over the last three years, Minox International Group Berhad reported free cash flow worth 8.3% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Minox International Group Berhad has RM2.74m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Minox International Group Berhad's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Minox International Group Berhad that you should be aware of before investing here.

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.

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.