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

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.' 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 note that Minho (M) Berhad (KLSE:MINHO) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See 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 RM29.2m at the end of December 2020, a reduction from RM38.2m over a year. But on the other hand it also has RM60.1m in cash, leading to a RM30.9m net cash position.

How Healthy Is Minho (M) Berhad's Balance Sheet?

According to the last reported balance sheet, Minho (M) Berhad had liabilities of RM51.9m due within 12 months, and liabilities of RM29.4m due beyond 12 months. Offsetting this, it had RM60.1m in cash and RM26.6m in receivables that were due within 12 months. So it actually has RM5.48m more liquid assets than total liabilities.

This surplus suggests that Minho (M) Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Minho (M) Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Minho (M) Berhad's EBIT fell a jaw-dropping 38% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Minho (M) Berhad actually produced more free cash flow than EBIT. 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 RM30.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM40m, being 205% 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. We've identified 3 warning signs with Minho (M) Berhad (at least 1 which is concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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