Would Minetech Resources Berhad (KLSE:MINETEC) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Minetech Resources Berhad (KLSE:MINETEC) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Minetech Resources Berhad

How Much Debt Does Minetech Resources Berhad Carry?

As you can see below, at the end of September 2021, Minetech Resources Berhad had RM40.7m of debt, up from RM14.5m a year ago. Click the image for more detail. However, because it has a cash reserve of RM12.0m, its net debt is less, at about RM28.7m.

How Strong 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 RM81.3m due within 12 months and liabilities of RM17.7m due beyond that. Offsetting these obligations, it had cash of RM12.0m as well as receivables valued at RM74.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM12.4m.

Given Minetech Resources Berhad has a market capitalization of RM104.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Over 12 months, Minetech Resources Berhad reported revenue of RM106m, which is a gain of 73%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Minetech Resources Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost RM4.9m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM43m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 Minetech Resources Berhad is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.