Is Mudajaya Group Berhad (KLSE:MUDAJYA) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Mudajaya Group Berhad (KLSE:MUDAJYA) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Mudajaya Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that Mudajaya Group Berhad had debt of RM619.1m at the end of June 2025, a reduction from RM833.0m over a year. On the flip side, it has RM249.4m in cash leading to net debt of about RM369.7m.

How Healthy Is Mudajaya Group Berhad's Balance Sheet?

The latest balance sheet data shows that Mudajaya Group Berhad had liabilities of RM715.8m due within a year, and liabilities of RM367.2m falling due after that. On the other hand, it had cash of RM249.4m and RM600.2m worth of receivables due within a year. So its liabilities total RM233.5m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM265.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mudajaya Group 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.

See our latest analysis for Mudajaya Group Berhad

Over 12 months, Mudajaya Group Berhad made a loss at the EBIT level, and saw its revenue drop to RM279m, which is a fall of 37%. To be frank that doesn't bode well.

Caveat Emptor

While Mudajaya Group 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 RM10m. 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. Surprisingly, we note that it actually reported positive free cash flow of RM278m and a profit of RM107m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Be aware that Mudajaya Group Berhad is showing 4 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.