MAG Holdings Berhad (KLSE:MAG) Seems To Use Debt Quite 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. We note that MAG Holdings Berhad (KLSE:MAG) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for MAG Holdings Berhad

How Much Debt Does MAG Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 MAG Holdings Berhad had RM54.8m of debt, an increase on RM50.2m, over one year. However, it does have RM104.2m in cash offsetting this, leading to net cash of RM49.5m.

How Strong Is MAG Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, MAG Holdings Berhad had liabilities of RM31.9m due within 12 months, and liabilities of RM49.1m due beyond 12 months. On the other hand, it had cash of RM104.2m and RM33.1m worth of receivables due within a year. So it can boast RM56.3m more liquid assets than total liabilities.

This surplus strongly suggests that MAG Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, MAG Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that MAG Holdings Berhad improved its EBIT from a last year's loss to a positive RM4.3m. There's no doubt that we learn most about debt from the balance sheet. But it is MAG Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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. MAG Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, MAG Holdings Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case MAG Holdings Berhad has RM49.5m in net cash and a decent-looking balance sheet. So we don't have any problem with MAG Holdings Berhad's use of debt. 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. For example, we've discovered 3 warning signs for MAG Holdings Berhad (1 doesn't sit too well with us!) that you should be aware of before investing here.

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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