Mycron Steel Berhad (KLSE:MYCRON) Has A Rock Solid 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 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mycron Steel Berhad

How Much Debt Does Mycron Steel Berhad Carry?

As you can see below, Mycron Steel Berhad had RM92.7m of debt at March 2021, down from RM130.3m a year prior. But it also has RM133.5m in cash to offset that, meaning it has RM40.8m net cash.

How Healthy Is Mycron Steel Berhad's Balance Sheet?

We can see from the most recent balance sheet that Mycron Steel Berhad had liabilities of RM236.7m falling due within a year, and liabilities of RM70.5m due beyond that. On the other hand, it had cash of RM133.5m and RM103.2m worth of receivables due within a year. So it has liabilities totalling RM70.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Mycron Steel Berhad has a market capitalization of RM212.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Mycron Steel Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Mycron Steel Berhad grew its EBIT by 2,252% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mycron Steel Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Mycron Steel 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

Although Mycron Steel Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM40.8m. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in RM107m. So we don't think Mycron Steel Berhad's use of debt is risky. 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. We've identified 3 warning signs with Mycron Steel Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

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.
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