Malaysia Steel Works (KL) Bhd (KLSE:MASTEEL) Has Debt But No Earnings; Should You Worry?

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 Malaysia Steel Works (KL) Bhd. (KLSE:MASTEEL) does use debt in its business. But is this debt a concern to shareholders?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Malaysia Steel Works (KL) Bhd

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

The image below, which you can click on for greater detail, shows that Malaysia Steel Works (KL) Bhd had debt of RM424.1m at the end of September 2020, a reduction from RM454.5m over a year. 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

We can see from the most recent balance sheet that Malaysia Steel Works (KL) Bhd had liabilities of RM702.4m falling due within a year, and liabilities of RM140.2m due beyond that. Offsetting these obligations, it had cash of RM60.0m as well as receivables valued at RM208.5m due within 12 months. So its liabilities total RM574.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM146.4m company, like a colossus towering over mere mortals. 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Malaysia Steel Works (KL) Bhd will need earnings to service that debt. 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

Over the last twelve months Malaysia Steel Works (KL) Bhd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost RM1.9m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of RM22m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. Be aware that Malaysia Steel Works (KL) Bhd is showing 4 warning signs in our investment analysis , and 2 of those are concerning...

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.

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