Does Malaysian Resources Corporation Berhad (KLSE:MRCB) Have A Healthy Balance Sheet?

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 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. As with many other companies Malaysian Resources Corporation Berhad (KLSE:MRCB) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Malaysian Resources Corporation Berhad

What Is Malaysian Resources Corporation Berhad's Net Debt?

As you can see below, at the end of December 2020, Malaysian Resources Corporation Berhad had RM1.93b of debt, up from RM1.83b a year ago. Click the image for more detail. However, it also had RM740.6m in cash, and so its net debt is RM1.19b.

A Look At Malaysian Resources Corporation Berhad's Liabilities

We can see from the most recent balance sheet that Malaysian Resources Corporation Berhad had liabilities of RM1.67b falling due within a year, and liabilities of RM2.09b due beyond that. On the other hand, it had cash of RM740.6m and RM1.31b worth of receivables due within a year. So it has liabilities totalling RM1.72b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RM2.23b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Malaysian Resources Corporation Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Malaysian Resources Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM1.2b, which is a fall of 9.2%. That's not what we would hope to see.

Caveat Emptor

Importantly, Malaysian Resources Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM117m at the EBIT level. 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 RM176m. In the meantime, we consider the stock very 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. For example Malaysian Resources Corporation Berhad has 3 warning signs (and 1 which can't be ignored) we think 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. 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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