- Paper and Forestry Products
Health Check: How Prudently Does Mentiga Corporation Berhad (KLSE:MENTIGA) Use Debt?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Mentiga Corporation Berhad (KLSE:MENTIGA) does carry debt. But should shareholders be worried about its use of debt?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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
How Much Debt Does Mentiga Corporation Berhad Carry?
The image below, which you can click on for greater detail, shows that at December 2022 Mentiga Corporation Berhad had debt of RM30.8m, up from RM28.3m in one year. However, because it has a cash reserve of RM1.09m, its net debt is less, at about RM29.7m.
How Healthy Is Mentiga Corporation Berhad's Balance Sheet?
The latest balance sheet data shows that Mentiga Corporation Berhad had liabilities of RM29.7m due within a year, and liabilities of RM66.8m falling due after that. Offsetting these obligations, it had cash of RM1.09m as well as receivables valued at RM1.83m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM93.6m.
The deficiency here weighs heavily on the RM33.7m 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 definitely think shareholders need to watch this one closely. At the end of the day, Mentiga Corporation Berhad would probably need a major re-capitalization if its creditors were to demand repayment. 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 Mentiga Corporation 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.
In the last year Mentiga Corporation Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to RM15m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Even though Mentiga Corporation Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable RM5.1m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized RM2.3m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. We've identified 4 warning signs with Mentiga Corporation Berhad (at least 3 which are potentially serious) , and understanding them should be part of your investment process.
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.
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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.
Mentiga Corporation Berhad
Mentiga Corporation Berhad, an investment holding company, engages in the oil palm and durian plantation, timber extraction and trading, mining, logging, and other agricultural activities in Malaysia.
Overvalued with worrying balance sheet.