Would Mieco Chipboard Berhad (KLSE:MIECO) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Mieco Chipboard Berhad (KLSE:MIECO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mieco Chipboard Berhad

What Is Mieco Chipboard Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Mieco Chipboard Berhad had RM211.2m of debt in September 2020, down from RM259.7m, one year before. However, it does have RM21.7m in cash offsetting this, leading to net debt of about RM189.5m.

A Look At Mieco Chipboard Berhad's Liabilities

We can see from the most recent balance sheet that Mieco Chipboard Berhad had liabilities of RM224.0m falling due within a year, and liabilities of RM108.6m due beyond that. Offsetting these obligations, it had cash of RM21.7m as well as receivables valued at RM72.9m due within 12 months. So it has liabilities totalling RM237.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Mieco Chipboard Berhad has a market capitalization of RM443.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mieco Chipboard 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.

In the last year Mieco Chipboard Berhad had a loss before interest and tax, and actually shrunk its revenue by 13%, to RM375m. That's not what we would hope to see.

Caveat Emptor

While Mieco Chipboard 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 RM1.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM31m. In the meantime, we consider the stock very risky. 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. For example Mieco Chipboard Berhad has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

When trading Mieco Chipboard Berhad or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.