Here's Why Majuperak Holdings Berhad (KLSE:MJPERAK) Can Afford Some Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Majuperak Holdings Berhad (KLSE:MJPERAK) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Majuperak Holdings Berhad

How Much Debt Does Majuperak Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that Majuperak Holdings Berhad had debt of RM11.7m at the end of December 2023, a reduction from RM12.7m over a year. However, it does have RM2.88m in cash offsetting this, leading to net debt of about RM8.87m.

A Look At Majuperak Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Majuperak Holdings Berhad had liabilities of RM73.8m due within 12 months and liabilities of RM21.2m due beyond that. Offsetting this, it had RM2.88m in cash and RM94.0m in receivables that were due within 12 months. So it can boast RM1.92m more liquid assets than total liabilities.

This short term liquidity is a sign that Majuperak Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But it is Majuperak Holdings 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.

In the last year Majuperak Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 22%, to RM20m. To be frank that doesn't bode well.

Caveat Emptor

While Majuperak Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM21m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Majuperak Holdings Berhad (1 shouldn't be ignored) you should be aware of.

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. 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.