Master-Pack Group Berhad (KLSE:MASTER) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Master-Pack Group Berhad (KLSE:MASTER) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Master-Pack Group Berhad

What Is Master-Pack Group Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Master-Pack Group Berhad had RM7.18m of debt in December 2020, down from RM12.4m, one year before. However, its balance sheet shows it holds RM38.0m in cash, so it actually has RM30.8m net cash.

A Look At Master-Pack Group Berhad's Liabilities

According to the last reported balance sheet, Master-Pack Group Berhad had liabilities of RM20.8m due within 12 months, and liabilities of RM6.57m due beyond 12 months. On the other hand, it had cash of RM38.0m and RM25.9m worth of receivables due within a year. So it actually has RM36.5m more liquid assets than total liabilities.

This luscious liquidity implies that Master-Pack Group Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Master-Pack Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Master-Pack Group Berhad's load is not too heavy, because its EBIT was down 28% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Master-Pack Group Berhad 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Master-Pack Group Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Master-Pack Group Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Master-Pack Group Berhad has RM30.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM25m, being 123% of its EBIT. So is Master-Pack Group Berhad's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Master-Pack Group Berhad that you should be aware of.

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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