Is Malaysia Marine and Heavy Engineering Holdings Berhad (KLSE:MHB) Using Debt Sensibly?

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, Malaysia Marine and Heavy Engineering Holdings Berhad (KLSE:MHB) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Malaysia Marine and Heavy Engineering Holdings Berhad

What Is Malaysia Marine and Heavy Engineering Holdings Berhad's Debt?

As you can see below, at the end of March 2021, Malaysia Marine and Heavy Engineering Holdings Berhad had RM267.2m of debt, up from RM208.6m a year ago. Click the image for more detail. But it also has RM663.0m in cash to offset that, meaning it has RM395.7m net cash.

A Look At Malaysia Marine and Heavy Engineering Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Malaysia Marine and Heavy Engineering Holdings Berhad had liabilities of RM985.8m due within 12 months and liabilities of RM253.4m due beyond that. Offsetting these obligations, it had cash of RM663.0m as well as receivables valued at RM523.6m due within 12 months. So it has liabilities totalling RM52.6m more than its cash and near-term receivables, combined.

Given Malaysia Marine and Heavy Engineering Holdings Berhad has a market capitalization of RM744.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Malaysia Marine and Heavy Engineering Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Malaysia Marine and Heavy Engineering Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Malaysia Marine and Heavy Engineering Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to RM1.6b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Malaysia Marine and Heavy Engineering Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Malaysia Marine and Heavy Engineering Holdings Berhad had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through RM46m of cash and made a loss of RM507m. Given it only has net cash of RM395.7m, the company may need to raise more capital if it doesn't reach break-even soon. Malaysia Marine and Heavy Engineering Holdings Berhad's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Malaysia Marine and Heavy Engineering Holdings Berhad has 1 warning sign we think you should be aware of.

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. 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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