MSM Malaysia Holdings Berhad (KLSE:MSM) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies MSM Malaysia Holdings Berhad (KLSE:MSM) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for MSM Malaysia Holdings Berhad

How Much Debt Does MSM Malaysia Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 MSM Malaysia Holdings Berhad had RM879.7m of debt, an increase on RM796.6m, over one year. However, it also had RM204.9m in cash, and so its net debt is RM674.8m.

A Look At MSM Malaysia Holdings Berhad's Liabilities

According to the last reported balance sheet, MSM Malaysia Holdings Berhad had liabilities of RM941.1m due within 12 months, and liabilities of RM355.9m due beyond 12 months. On the other hand, it had cash of RM204.9m and RM286.0m worth of receivables due within a year. So its liabilities total RM806.2m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM738.1m, we think shareholders really should watch MSM Malaysia Holdings Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, MSM Malaysia Holdings Berhad reported revenue of RM2.6b, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, MSM Malaysia Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM146m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM23m over the last twelve months. That means it's on the risky side of things. 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. To that end, you should learn about the 2 warning signs we've spotted with MSM Malaysia Holdings Berhad (including 1 which is significant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.