Is M K Land Holdings Berhad (KLSE:MKLAND) Using Debt In A Risky Way?

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.' 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. As with many other companies M K Land Holdings Berhad (KLSE:MKLAND) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for M K Land Holdings Berhad

What Is M K Land Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 M K Land Holdings Berhad had RM36.6m of debt, an increase on RM26.2m, over one year. However, its balance sheet shows it holds RM76.0m in cash, so it actually has RM39.4m net cash.

How Strong Is M K Land Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that M K Land Holdings Berhad had liabilities of RM324.6m due within a year, and liabilities of RM104.6m falling due after that. Offsetting this, it had RM76.0m in cash and RM92.5m in receivables that were due within 12 months. So its liabilities total RM260.7m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM186.7m, we think shareholders really should watch M K Land Holdings Berhad's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. M K Land Holdings 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is M K Land 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.

Over 12 months, M K Land Holdings Berhad reported revenue of RM193m, which is a gain of 20%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is M K Land Holdings Berhad?

Although M K Land Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of RM16m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The saving grace for the stock is the strong revenue growth of 20% over the last twelve months. But we genuinely do think the balance sheet is a risky. 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 example M K Land Holdings Berhad has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.