Does Milux Corporation Berhad (KLSE:MILUX) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Milux Corporation Berhad (KLSE:MILUX) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Milux Corporation Berhad

What Is Milux Corporation Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Milux Corporation Berhad had RM6.94m of debt, an increase on RM3.94m, over one year. But on the other hand it also has RM14.6m in cash, leading to a RM7.64m net cash position.

How Strong Is Milux Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that Milux Corporation Berhad had liabilities of RM19.4m falling due within a year, and liabilities of RM2.30m due beyond that. Offsetting this, it had RM14.6m in cash and RM15.3m in receivables that were due within 12 months. So it actually has RM8.11m more liquid assets than total liabilities.

This surplus suggests that Milux Corporation Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Milux Corporation Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Milux Corporation Berhad improved its EBIT from a last year's loss to a positive RM1.6m. There's no doubt that we learn most about debt from the balance sheet. But it is Milux Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Milux Corporation Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Milux Corporation Berhad recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Milux Corporation Berhad has net cash of RM7.64m, as well as more liquid assets than liabilities. So we don't have any problem with Milux Corporation Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Milux Corporation Berhad , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.