Does Magma Group Berhad (KLSE:MAGMA) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Magma Group Berhad (KLSE:MAGMA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for Magma Group Berhad

What Is Magma Group Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Magma Group Berhad had debt of RM97.7m, up from RM79.4m in one year. However, it also had RM6.78m in cash, and so its net debt is RM90.9m.

How Healthy Is Magma Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that Magma Group Berhad had liabilities of RM52.7m falling due within a year, and liabilities of RM112.2m due beyond that. On the other hand, it had cash of RM6.78m and RM60.1m worth of receivables due within a year. So its liabilities total RM98.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Magma Group Berhad has a market capitalization of RM222.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Magma Group 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.

Over 12 months, Magma Group Berhad made a loss at the EBIT level, and saw its revenue drop to RM16m, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

Not only did Magma Group Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM4.1m 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. Another cause for caution is that is bled RM46m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example, we've discovered 4 warning signs for Magma Group Berhad (1 is concerning!) that you should be aware of before investing here.

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.