Majuperak Holdings Berhad (KLSE:MJPERAK) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Majuperak Holdings Berhad (KLSE:MJPERAK) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Majuperak Holdings Berhad

What Is Majuperak Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Majuperak Holdings Berhad had debt of RM12.7m, up from RM11.0m in one year. However, it does have RM5.23m in cash offsetting this, leading to net debt of about RM7.42m.

A Look At Majuperak Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Majuperak Holdings Berhad had liabilities of RM80.5m falling due within a year, and liabilities of RM23.0m due beyond that. Offsetting these obligations, it had cash of RM5.23m as well as receivables valued at RM100.9m due within 12 months. So it actually has RM2.74m more liquid assets than total liabilities.

This surplus suggests that Majuperak Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Majuperak Holdings Berhad will need earnings to service that debt. 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 11%, to RM26m. That's not what we would hope to see.

Caveat Emptor

Not only did Majuperak Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM14m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Majuperak Holdings Berhad is showing 2 warning signs in our investment analysis , you should know about...

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.