Is Mitrajaya Holdings Berhad (KLSE:MITRA) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Mitrajaya Holdings Berhad (KLSE:MITRA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that MITRA is potentially undervalued!

What Is Mitrajaya Holdings Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Mitrajaya Holdings Berhad had RM114.0m in debt in June 2022; about the same as the year before. However, because it has a cash reserve of RM39.9m, its net debt is less, at about RM74.2m.

A Look At Mitrajaya Holdings Berhad's Liabilities

The latest balance sheet data shows that Mitrajaya Holdings Berhad had liabilities of RM317.4m due within a year, and liabilities of RM7.56m falling due after that. On the other hand, it had cash of RM39.9m and RM274.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM10.7m.

Since publicly traded Mitrajaya Holdings Berhad shares are worth a total of RM172.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mitrajaya Holdings Berhad will need earnings to service that debt. 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 RM299m, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

While Mitrajaya Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM12m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 RM13m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Mitrajaya Holdings Berhad (of which 1 is significant!) 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.