Stock Analysis

Is Malayan Cement Berhad (KLSE:MCEMENT) Weighed On By Its Debt Load?

KLSE:MCEMENT
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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 note that Malayan Cement Berhad (KLSE:MCEMENT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Malayan Cement Berhad

How Much Debt Does Malayan Cement Berhad Carry?

As you can see below, at the end of September 2021, Malayan Cement Berhad had RM3.99b of debt, up from RM929.6m a year ago. Click the image for more detail. However, it also had RM598.0m in cash, and so its net debt is RM3.39b.

debt-equity-history-analysis
KLSE:MCEMENT Debt to Equity History January 26th 2022

How Strong Is Malayan Cement Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Malayan Cement Berhad had liabilities of RM1.55b due within 12 months and liabilities of RM3.38b due beyond that. On the other hand, it had cash of RM598.0m and RM551.6m worth of receivables due within a year. So it has liabilities totalling RM3.78b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's RM2.75b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Malayan Cement Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Malayan Cement Berhad had a loss before interest and tax, and actually shrunk its revenue by 17%, to RM1.3b. That's not what we would hope to see.

Caveat Emptor

Not only did Malayan Cement Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM20m at the EBIT level. 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. It's fair to say the loss of RM15m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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 Malayan Cement 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.

Valuation is complex, but we're helping make it simple.

Find out whether Malayan Cement Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.