Is Muhibbah Engineering (M) Bhd (KLSE:MUHIBAH) Weighed On By Its Debt Load?

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. We note that Muhibbah Engineering (M) Bhd. (KLSE:MUHIBAH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Muhibbah Engineering (M) Bhd

How Much Debt Does Muhibbah Engineering (M) Bhd Carry?

The chart below, which you can click on for greater detail, shows that Muhibbah Engineering (M) Bhd had RM1.09b in debt in September 2020; about the same as the year before. However, it also had RM541.3m in cash, and so its net debt is RM552.0m.

A Look At Muhibbah Engineering (M) Bhd's Liabilities

Zooming in on the latest balance sheet data, we can see that Muhibbah Engineering (M) Bhd had liabilities of RM1.96b due within 12 months and liabilities of RM136.7m due beyond that. Offsetting these obligations, it had cash of RM541.3m as well as receivables valued at RM1.13b due within 12 months. So it has liabilities totalling RM426.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of RM425.4m, we think shareholders really should watch Muhibbah Engineering (M) Bhd'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 Muhibbah Engineering (M) Bhd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Muhibbah Engineering (M) Bhd had a loss before interest and tax, and actually shrunk its revenue by 14%, to RM1.3b. We would much prefer see growth.

Caveat Emptor

While Muhibbah Engineering (M) Bhd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost RM36m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous 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 RM121m. And until that time we think this is a risky stock. 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 Muhibbah Engineering (M) Bhd (of which 1 is a bit concerning!) 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.

If you decide to trade Muhibbah Engineering (M) Bhd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*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.