Is Malaysia Steel Works (KL) Bhd (KLSE:MASTEEL) Using Debt In A Risky Way?

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. As with many other companies Malaysia Steel Works (KL) Bhd. (KLSE:MASTEEL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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 Malaysia Steel Works (KL) Bhd

What Is Malaysia Steel Works (KL) Bhd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Malaysia Steel Works (KL) Bhd had RM424.1m of debt in September 2020, down from RM454.5m, one year before. However, because it has a cash reserve of RM60.0m, its net debt is less, at about RM364.1m.

A Look At Malaysia Steel Works (KL) Bhd's Liabilities

Zooming in on the latest balance sheet data, we can see that Malaysia Steel Works (KL) Bhd had liabilities of RM702.4m due within 12 months and liabilities of RM140.2m due beyond that. Offsetting this, it had RM60.0m in cash and RM208.5m in receivables that were due within 12 months. So its liabilities total RM574.2m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM270.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Malaysia Steel Works (KL) Bhd would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Malaysia Steel Works (KL) Bhd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Malaysia Steel Works (KL) Bhd reported revenue of RM1.4b, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Malaysia Steel Works (KL) Bhd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM1.9m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of RM22m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Malaysia Steel Works (KL) Bhd (including 2 which are 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. 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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