Is Mycron Steel Berhad (KLSE:MYCRON) A Risky Investment?

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 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. We can see that Mycron Steel Berhad (KLSE:MYCRON) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that MYCRON is potentially undervalued!

How Much Debt Does Mycron Steel Berhad Carry?

As you can see below, at the end of June 2022, Mycron Steel Berhad had RM102.2m of debt, up from RM86.1m a year ago. Click the image for more detail. However, it does have RM115.5m in cash offsetting this, leading to net cash of RM13.3m.

How Healthy Is Mycron Steel Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mycron Steel Berhad had liabilities of RM269.6m due within 12 months and liabilities of RM87.4m due beyond that. Offsetting these obligations, it had cash of RM115.5m as well as receivables valued at RM72.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM168.7m.

Given this deficit is actually higher than the company's market capitalization of RM143.9m, we think shareholders really should watch Mycron Steel Berhad's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Mycron Steel Berhad boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

On the other hand, Mycron Steel Berhad saw its EBIT drop by 3.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Mycron Steel 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 company can only pay off debt with cold hard cash, not accounting profits. While Mycron Steel Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, Mycron Steel Berhad recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Mycron Steel Berhad does have more liabilities than liquid assets, it also has net cash of RM13.3m. So while Mycron Steel Berhad does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Mycron Steel Berhad .

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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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.