Does Mentiga Corporation Berhad (KLSE:MENTIGA) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Mentiga Corporation Berhad (KLSE:MENTIGA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Mentiga Corporation Berhad

What Is Mentiga Corporation Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Mentiga Corporation Berhad had RM27.9m of debt, an increase on RM25.6m, over one year. However, it does have RM991.0k in cash offsetting this, leading to net debt of about RM26.9m.

How Strong Is Mentiga Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that Mentiga Corporation Berhad had liabilities of RM26.3m falling due within a year, and liabilities of RM53.4m due beyond that. Offsetting this, it had RM991.0k in cash and RM8.19m in receivables that were due within 12 months. So its liabilities total RM70.5m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM56.0m, we think shareholders really should watch Mentiga Corporation Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mentiga Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Mentiga Corporation Berhad made a loss at the EBIT level, and saw its revenue drop to RM8.2m, which is a fall of 67%. That makes us nervous, to say the least.

Caveat Emptor

While Mentiga Corporation Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM4.6m. 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. Not least because it burned through RM3.5m in negative free cash flow over the last year. That means it's on the risky side of things. 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 3 warning signs for Mentiga Corporation Berhad (1 makes us a bit uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.