Is Minetech Resources Berhad (KLSE:MINETEC) A Risky Investment?

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.' 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 can see that Minetech Resources Berhad (KLSE:MINETEC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Minetech Resources Berhad

How Much Debt Does Minetech Resources Berhad Carry?

The image below, which you can click on for greater detail, shows that Minetech Resources Berhad had debt of RM14.5m at the end of September 2020, a reduction from RM22.1m over a year. However, it does have RM15.3m in cash offsetting this, leading to net cash of RM751.0k.

How Healthy Is Minetech Resources Berhad's Balance Sheet?

We can see from the most recent balance sheet that Minetech Resources Berhad had liabilities of RM39.9m falling due within a year, and liabilities of RM13.8m due beyond that. Offsetting these obligations, it had cash of RM15.3m as well as receivables valued at RM36.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM2.32m.

This state of affairs indicates that Minetech Resources Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM238.9m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Minetech Resources Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Minetech Resources 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 Minetech Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 45%, to RM61m. To be frank that doesn't bode well.

So How Risky Is Minetech Resources Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Minetech Resources Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM13m of cash and made a loss of RM14m. With only RM751.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Minetech Resources Berhad (2 shouldn't be ignored) 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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