Here's Why Genting Malaysia Berhad (KLSE:GENM) Can Afford Some Debt

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 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?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Genting Malaysia Berhad

How Much Debt Does Genting Malaysia Berhad Carry?

As you can see below, at the end of December 2021, Genting Malaysia Berhad had RM13.0b of debt, up from RM9.40b a year ago. Click the image for more detail. However, it does have RM4.67b in cash offsetting this, leading to net debt of about RM8.37b.

How Healthy Is Genting Malaysia Berhad's Balance Sheet?

The latest balance sheet data shows that Genting Malaysia Berhad had liabilities of RM3.05b due within a year, and liabilities of RM14.1b falling due after that. Offsetting these obligations, it had cash of RM4.67b as well as receivables valued at RM561.5m due within 12 months. So it has liabilities totalling RM11.9b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM17.3b, 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.

In the last year Genting Malaysia Berhad had a loss before interest and tax, and actually shrunk its revenue by 8.2%, to RM4.2b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Genting Malaysia Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM544m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM405m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Genting Malaysia Berhad .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.