Minda Global Berhad (KLSE:MINDA) Use Of Debt Could Be Considered Risky

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Minda Global Berhad (KLSE:MINDA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Minda Global Berhad

What Is Minda Global Berhad's Net Debt?

As you can see below, Minda Global Berhad had RM17.4m of debt at June 2022, down from RM25.9m a year prior. But on the other hand it also has RM22.5m in cash, leading to a RM5.06m net cash position.

A Look At Minda Global Berhad's Liabilities

We can see from the most recent balance sheet that Minda Global Berhad had liabilities of RM65.2m falling due within a year, and liabilities of RM156.4m due beyond that. Offsetting these obligations, it had cash of RM22.5m as well as receivables valued at RM22.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM176.5m.

This deficit casts a shadow over the RM66.1m 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. Minda Global Berhad boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Unfortunately, Minda Global Berhad's EBIT flopped 18% over the last four quarters. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Minda Global Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, Minda Global Berhad recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Minda Global Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM5.06m. Unfortunately, though, both its struggle level of total liabilities and its interest cover leave us concerned about Minda Global Berhad So even though it has net cash, we do think the business has some risks worth watching. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Minda Global Berhad you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.