Health Check: How Prudently Does Minetech Resources Berhad (KLSE:MINETEC) Use Debt?

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. We note that Minetech Resources Berhad (KLSE:MINETEC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Minetech Resources Berhad

What Is Minetech Resources Berhad's Net Debt?

As you can see below, Minetech Resources Berhad had RM15.2m of debt at December 2020, down from RM21.6m a year prior. But it also has RM21.3m in cash to offset that, meaning it has RM6.16m net cash.

How Healthy Is Minetech Resources Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Minetech Resources Berhad had liabilities of RM44.7m due within 12 months and liabilities of RM17.8m due beyond that. Offsetting these obligations, it had cash of RM21.3m as well as receivables valued at RM51.5m due within 12 months. So it can boast RM10.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Minetech Resources Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Minetech Resources Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Minetech Resources Berhad will need earnings to service that debt. 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 Minetech Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 23%, to RM70m. To be frank that doesn't bode well.

So How Risky Is Minetech Resources Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Minetech Resources Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM19m and booked a RM15m accounting loss. Given it only has net cash of RM6.16m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 example - Minetech Resources Berhad has 2 warning signs we think you should be aware of.

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.

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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.
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