We Think MAG Holdings Berhad (KLSE:MAG) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that MAG Holdings Berhad (KLSE:MAG) does use debt in its business. 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MAG Holdings Berhad

What Is MAG Holdings Berhad's Debt?

The chart below, which you can click on for greater detail, shows that MAG Holdings Berhad had RM186.2m in debt in March 2023; about the same as the year before. However, its balance sheet shows it holds RM211.8m in cash, so it actually has RM25.6m net cash.

How Strong Is MAG Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, MAG Holdings Berhad had liabilities of RM131.3m due within 12 months, and liabilities of RM161.2m due beyond 12 months. Offsetting these obligations, it had cash of RM211.8m as well as receivables valued at RM96.2m due within 12 months. So it can boast RM15.5m more liquid assets than total liabilities.

This short term liquidity is a sign that MAG Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that MAG Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that MAG Holdings Berhad has boosted its EBIT by 70%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since MAG Holdings 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 company can only pay off debt with cold hard cash, not accounting profits. While MAG Holdings 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. During the last three years, MAG Holdings Berhad burned a lot of cash. 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 RM25.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 70% year-on-year EBIT growth. So we are not troubled with MAG Holdings Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - MAG Holdings Berhad has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.