Minho (M) Berhad (KLSE:MINHO) Has A Pretty Healthy Balance Sheet

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Minho (M) Berhad (KLSE:MINHO) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Minho (M) Berhad

What Is Minho (M) Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Minho (M) Berhad had debt of RM33.5m at the end of September 2020, a reduction from RM46.2m over a year. However, it does have RM57.5m in cash offsetting this, leading to net cash of RM24.0m.

A Look At Minho (M) Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Minho (M) Berhad had liabilities of RM50.9m due within 12 months and liabilities of RM36.1m due beyond that. Offsetting this, it had RM57.5m in cash and RM40.9m in receivables that were due within 12 months. So it can boast RM11.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Minho (M) Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Minho (M) Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Minho (M) Berhad's EBIT fell a jaw-dropping 73% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is Minho (M) 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Minho (M) Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Minho (M) Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Minho (M) Berhad has net cash of RM24.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM52m, being 149% of its EBIT. So we are not troubled with Minho (M) Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Minho (M) Berhad (including 1 which is concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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