Is Mentiga Corporation Berhad (KLSE:MENTIGA) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Mentiga Corporation Berhad (KLSE:MENTIGA) makes use of debt. But the real question is whether this debt is making the company risky.

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 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mentiga Corporation Berhad

How Much Debt Does Mentiga Corporation Berhad Carry?

The chart below, which you can click on for greater detail, shows that Mentiga Corporation Berhad had RM28.0m in debt in March 2022; about the same as the year before. However, because it has a cash reserve of RM1.57m, its net debt is less, at about RM26.5m.

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 RM27.0m falling due within a year, and liabilities of RM60.9m due beyond that. Offsetting this, it had RM1.57m in cash and RM6.41m in receivables that were due within 12 months. So its liabilities total RM79.9m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM41.3m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Mentiga Corporation Berhad 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 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 had a loss before interest and tax, and actually shrunk its revenue by 7.3%, to RM14m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Mentiga Corporation Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM15m. When we look at that alongside the significant liabilities, we're not particularly confident 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 RM827k in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Mentiga Corporation Berhad (2 are a bit unpleasant) 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.