Minetech Resources Berhad (KLSE:MINETEC) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Minetech Resources Berhad (KLSE:MINETEC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that MINETEC is potentially overvalued!

How Much Debt Does Minetech Resources Berhad Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Minetech Resources Berhad had debt of RM42.8m, up from RM36.3m in one year. On the flip side, it has RM8.53m in cash leading to net debt of about RM34.3m.

A Look At Minetech Resources Berhad's Liabilities

According to the last reported balance sheet, Minetech Resources Berhad had liabilities of RM81.9m due within 12 months, and liabilities of RM19.3m due beyond 12 months. On the other hand, it had cash of RM8.53m and RM70.9m worth of receivables due within a year. So its liabilities total RM21.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Minetech Resources Berhad has a market capitalization of RM75.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Minetech Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 11%, to RM93m. We would much prefer see growth.

Caveat Emptor

Not only did Minetech Resources Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM21m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM35m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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, we've discovered 4 warning signs for Minetech Resources Berhad (2 are a bit unpleasant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.