Is Mentiga Corporation Berhad (KLSE:MENTIGA) Weighed On By Its Debt Load?

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.' 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. As with many other companies Mentiga Corporation Berhad (KLSE:MENTIGA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Mentiga Corporation Berhad

What Is Mentiga Corporation Berhad's Net Debt?

As you can see below, at the end of September 2024, Mentiga Corporation Berhad had RM31.0m of debt, up from RM27.1m a year ago. Click the image for more detail. On the flip side, it has RM1.72m in cash leading to net debt of about RM29.3m.

A Look At Mentiga Corporation Berhad's Liabilities

We can see from the most recent balance sheet that Mentiga Corporation Berhad had liabilities of RM33.1m falling due within a year, and liabilities of RM88.0m due beyond that. Offsetting this, it had RM1.72m in cash and RM4.54m in receivables that were due within 12 months. So it has liabilities totalling RM114.8m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM33.3m 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. There's no doubt that we learn most about debt from the balance sheet. 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 4.9%, to RM27m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Mentiga Corporation Berhad produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RM13m 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. But we think that is unlikely, given it is low on liquid assets, and burned through RM1.7m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Mentiga Corporation Berhad is showing 4 warning signs in our investment analysis , you should know about...

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.