We Think United Malacca Berhad (KLSE:UMCCA) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that United Malacca Berhad (KLSE:UMCCA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for United Malacca Berhad

What Is United Malacca Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that United Malacca Berhad had RM152.2m of debt in July 2020, down from RM217.7m, one year before. However, because it has a cash reserve of RM52.8m, its net debt is less, at about RM99.4m.

A Look At United Malacca Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that United Malacca Berhad had liabilities of RM169.5m due within 12 months and liabilities of RM263.6m due beyond that. Offsetting these obligations, it had cash of RM52.8m as well as receivables valued at RM86.4m due within 12 months. So it has liabilities totalling RM293.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because United Malacca Berhad is worth RM1.09b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 United Malacca 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, United Malacca Berhad reported revenue of RM337m, which is a gain of 63%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate United Malacca Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at RM9.9m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM47m of cash over the last year. So to be blunt we think it is risky. 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 1 warning sign for United Malacca Berhad that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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