Is Marine & General Berhad (KLSE:M&G) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Marine & General Berhad (KLSE:M&G) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Marine & General Berhad

What Is Marine & General Berhad's Debt?

The image below, which you can click on for greater detail, shows that Marine & General Berhad had debt of RM741.4m at the end of July 2021, a reduction from RM957.1m over a year. On the flip side, it has RM32.3m in cash leading to net debt of about RM709.1m.

How Healthy Is Marine & General Berhad's Balance Sheet?

We can see from the most recent balance sheet that Marine & General Berhad had liabilities of RM107.9m falling due within a year, and liabilities of RM693.9m due beyond that. Offsetting these obligations, it had cash of RM32.3m as well as receivables valued at RM42.2m due within 12 months. So its liabilities total RM727.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM83.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Marine & General Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Marine & General 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.

In the last year Marine & General Berhad had a loss before interest and tax, and actually shrunk its revenue by 20%, to RM173m. We would much prefer see growth.

Caveat Emptor

Not only did Marine & General Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM66m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But on the bright side the company actually produced a statutory profit of RM8.0m and free cash flow of RM14m. So its situation may not be as precarious as the EBIT would imply. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Marine & General Berhad has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.

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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