Is Malaysian Resources Corporation Berhad (KLSE:MRCB) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Malaysian Resources Corporation Berhad (KLSE:MRCB) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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?

The image below, which you can click on for greater detail, shows that Malaysian Resources Corporation Berhad had debt of RM1.83b at the end of March 2021, a reduction from RM1.92b over a year. However, it does have RM509.5m in cash offsetting this, leading to net debt of about RM1.32b.

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

Zooming in on the latest balance sheet data, we can see that Malaysian Resources Corporation Berhad had liabilities of RM1.59b due within 12 months and liabilities of RM2.02b due beyond that. Offsetting these obligations, it had cash of RM509.5m as well as receivables valued at RM1.32b due within 12 months. So it has liabilities totalling RM1.77b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM1.72b, we think shareholders really should watch Malaysian Resources Corporation Berhad's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. 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 RM1.0b, which is a fall of 34%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Malaysian Resources Corporation Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM191m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of RM187m. In the meantime, we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Malaysian Resources Corporation Berhad (of which 1 is concerning!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.