Is Malaysian Resources Corporation Berhad (KLSE:MRCB) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Malaysian Resources Corporation Berhad (KLSE:MRCB) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Malaysian Resources Corporation Berhad

How Much Debt Does Malaysian Resources Corporation Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Malaysian Resources Corporation Berhad had RM1.96b of debt, an increase on RM1.73b, over one year. However, it does have RM613.1m in cash offsetting this, leading to net debt of about RM1.34b.

How Strong Is Malaysian Resources Corporation Berhad's Balance Sheet?

The latest balance sheet data shows that Malaysian Resources Corporation Berhad had liabilities of RM1.63b due within a year, and liabilities of RM2.14b falling due after that. On the other hand, it had cash of RM613.1m and RM1.39b worth of receivables due within a year. So it has liabilities totalling RM1.77b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM1.90b, so it does suggest shareholders should keep an eye on Malaysian Resources Corporation Berhad's use of debt. 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 reported revenue of RM1.4b, which is a gain of 11%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Malaysian Resources Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM232m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of RM197m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Malaysian Resources Corporation Berhad (1 shouldn't be ignored) you should be aware of.

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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