Is Minda Global Berhad (KLSE:MINDA) Using Too Much Debt?

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.' 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. As with many other companies Minda Global Berhad (KLSE:MINDA) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Minda Global Berhad

What Is Minda Global Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Minda Global Berhad had RM25.6m of debt, an increase on RM17.0m, over one year. However, because it has a cash reserve of RM5.45m, its net debt is less, at about RM20.1m.

How Strong Is Minda Global Berhad's Balance Sheet?

According to the last reported balance sheet, Minda Global Berhad had liabilities of RM73.5m due within 12 months, and liabilities of RM225.5m due beyond 12 months. Offsetting these obligations, it had cash of RM5.45m as well as receivables valued at RM43.4m due within 12 months. So its liabilities total RM250.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM68.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Minda Global Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Minda Global Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Minda Global Berhad made a loss at the EBIT level, and saw its revenue drop to RM88m, which is a fall of 6.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, Minda Global Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM25m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized RM19m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Minda Global Berhad has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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.

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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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