Here's Why Mitrajaya Holdings Berhad (KLSE:MITRA) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Mitrajaya Holdings Berhad (KLSE:MITRA) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Mitrajaya Holdings Berhad

What Is Mitrajaya Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Mitrajaya Holdings Berhad had debt of RM86.3m at the end of December 2021, a reduction from RM112.5m over a year. On the flip side, it has RM10.5m in cash leading to net debt of about RM75.9m.

How Strong Is Mitrajaya Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mitrajaya Holdings Berhad had liabilities of RM299.4m due within 12 months and liabilities of RM5.80m due beyond that. Offsetting these obligations, it had cash of RM10.5m as well as receivables valued at RM290.4m due within 12 months. So these liquid assets roughly match the total liabilities.

Of course, Mitrajaya Holdings Berhad has a market capitalization of RM197.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mitrajaya Holdings 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.

Over 12 months, Mitrajaya Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM289m, which is a fall of 20%. We would much prefer see growth.

Caveat Emptor

Not only did Mitrajaya Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM8.9m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of RM14m. So in short it's a really risky stock. 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 2 warning signs with Mitrajaya Holdings Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.