We Think Genting Malaysia Berhad (KLSE:GENM) Has A Fair Chunk Of 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.' 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 Genting Malaysia Berhad (KLSE:GENM) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Genting Malaysia Berhad

What Is Genting Malaysia Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Genting Malaysia Berhad had RM10.2b of debt in March 2021, down from RM10.9b, one year before. However, it also had RM2.57b in cash, and so its net debt is RM7.61b.

How Strong Is Genting Malaysia Berhad's Balance Sheet?

According to the last reported balance sheet, Genting Malaysia Berhad had liabilities of RM4.47b due within 12 months, and liabilities of RM10.3b due beyond 12 months. Offsetting this, it had RM2.57b in cash and RM599.5m in receivables that were due within 12 months. So its liabilities total RM11.6b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM16.6b, so it does suggest shareholders should keep an eye on Genting Malaysia Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Genting Malaysia Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Genting Malaysia Berhad had a loss before interest and tax, and actually shrunk its revenue by 67%, to RM3.2b. To be frank that doesn't bode well.

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 RM1.5b 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. However, it doesn't help that it burned through RM1.6b of cash over the last year. So suffice it to say we consider the stock very risky. 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. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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