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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Genting Malaysia Berhad (KLSE:GENM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.

See our latest analysis for Genting Malaysia Berhad

How Much Debt Does Genting Malaysia Berhad Carry?

As you can see below, at the end of March 2022, Genting Malaysia Berhad had RM11.7b of debt, up from RM10.2b a year ago. Click the image for more detail. However, it does have RM2.61b in cash offsetting this, leading to net debt of about RM9.04b.

How Strong Is Genting Malaysia Berhad's Balance Sheet?

According to the last reported balance sheet, Genting Malaysia Berhad had liabilities of RM2.94b due within 12 months, and liabilities of RM12.8b due beyond 12 months. Offsetting these obligations, it had cash of RM2.61b as well as receivables valued at RM811.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM12.3b.

This deficit is considerable relative to its market capitalization of RM17.1b, so it does suggest shareholders should keep an eye on Genting Malaysia Berhad's use of debt. 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.

Over 12 months, Genting Malaysia Berhad reported revenue of RM5.3b, which is a gain of 64%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Genting Malaysia Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost RM16m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM590m. So to be blunt we do think it is 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.

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. 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.