Genting Malaysia Berhad (KLSE:GENM) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Genting Malaysia Berhad (KLSE:GENM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Genting Malaysia Berhad

What Is Genting Malaysia Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Genting Malaysia Berhad had RM9.81b in debt in September 2020; about the same as the year before. On the flip side, it has RM4.05b in cash leading to net debt of about RM5.76b.

A Look At Genting Malaysia Berhad's Liabilities

According to the last reported balance sheet, Genting Malaysia Berhad had liabilities of RM3.38b due within 12 months, and liabilities of RM11.0b due beyond 12 months. On the other hand, it had cash of RM4.05b and RM658.5m worth of receivables due within a year. So its liabilities total RM9.68b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM14.1b. 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 ultimately the future profitability of the business will decide if Genting Malaysia Berhad can strengthen its balance sheet over time. 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 Genting Malaysia Berhad had a loss before interest and tax, and actually shrunk its revenue by 43%, to RM5.9b. That makes us nervous, to say the least.

Caveat Emptor

While Genting Malaysia 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. Indeed, it lost RM779m 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. However, it doesn't help that it burned through RM1.1b of cash over the last year. So suffice it to say we consider the stock very 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. Case in point: We've spotted 2 warning signs for Genting Malaysia Berhad you should be aware of, and 1 of them is a bit concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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