Is MSM Malaysia Holdings Berhad (KLSE:MSM) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, MSM Malaysia Holdings Berhad (KLSE:MSM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MSM Malaysia Holdings Berhad

How Much Debt Does MSM Malaysia Holdings Berhad Carry?

As you can see below, at the end of June 2023, MSM Malaysia Holdings Berhad had RM1.08b of debt, up from RM808.9m a year ago. Click the image for more detail. However, it does have RM237.2m in cash offsetting this, leading to net debt of about RM840.5m.

How Healthy Is MSM Malaysia Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that MSM Malaysia Holdings Berhad had liabilities of RM1.20b falling due within a year, and liabilities of RM320.5m due beyond that. Offsetting this, it had RM237.2m in cash and RM351.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM930.3m.

This is a mountain of leverage relative to its market capitalization of RM1.05b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MSM Malaysia Holdings Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, MSM Malaysia Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM2.1b, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

Not only did MSM Malaysia Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM108m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM183m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that MSM Malaysia Holdings Berhad is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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. 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.