Is Marine & General Berhad (KLSE:M&G) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Marine & General Berhad (KLSE:M&G) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Marine & General Berhad Carry?

As you can see below, Marine & General Berhad had RM763.5m of debt at October 2020, down from RM960.5m a year prior. However, it does have RM62.2m in cash offsetting this, leading to net debt of about RM701.2m.

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

According to the last reported balance sheet, Marine & General Berhad had liabilities of RM83.6m due within 12 months, and liabilities of RM727.0m due beyond 12 months. Offsetting these obligations, it had cash of RM62.2m as well as receivables valued at RM42.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM706.1m.

This deficit casts a shadow over the RM155.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Marine & General 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 it is Marine & General Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Marine & General Berhad reported revenue of RM208m, which is a gain of 7.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Marine & General Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM37m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. However, we note that trailing twelve month EBIT is worse than the free cash flow of RM14m and the profit of RM12m. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Marine & General Berhad has 4 warning signs (and 1 which is significant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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