Would Minetech Resources Berhad (KLSE:MINETEC) 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.' 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See 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 RM40.1m at the end of June 2023, a reduction from RM42.8m over a year. However, it does have RM7.41m in cash offsetting this, leading to net debt of about RM32.7m.

How Healthy Is Minetech Resources Berhad's Balance Sheet?

The latest balance sheet data shows that Minetech Resources Berhad had liabilities of RM100.9m due within a year, and liabilities of RM17.1m falling due after that. Offsetting this, it had RM7.41m in cash and RM85.1m in receivables that were due within 12 months. So it has liabilities totalling RM25.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Minetech Resources Berhad is worth RM61.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 RM126m, which is a gain of 36%, 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

Despite the top line growth, Minetech Resources Berhad still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM5.0m. 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. However, it doesn't help that it burned through RM12m of cash over the last year. So in short it's a really risky stock. 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 5 warning signs for Minetech Resources Berhad (3 are significant) 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. 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.