Is M K Land Holdings Berhad (KLSE:MKLAND) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, M K Land Holdings Berhad (KLSE:MKLAND) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 M K Land Holdings Berhad had RM43.9m of debt, an increase on RM23.0m, over one year. But it also has RM71.6m in cash to offset that, meaning it has RM27.7m net cash.

A Look At M K Land Holdings Berhad's Liabilities

The latest balance sheet data shows that M K Land Holdings Berhad had liabilities of RM323.1m due within a year, and liabilities of RM112.6m falling due after that. Offsetting these obligations, it had cash of RM71.6m as well as receivables valued at RM113.8m due within 12 months. So its liabilities total RM250.4m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM210.8m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since M K Land Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year M K Land Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to RM202m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is M K Land Holdings Berhad?

While M K Land Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of RM14m. 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 26% over the last twelve months. But the stock still looks risky to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for M K Land Holdings Berhad (of which 1 doesn't sit too well with us!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.