Matrix Concepts Holdings Berhad (KLSE:MATRIX) Has A Pretty Healthy 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Matrix Concepts Holdings Berhad (KLSE:MATRIX) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Matrix Concepts Holdings Berhad

What Is Matrix Concepts Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Matrix Concepts Holdings Berhad had RM370.1m of debt, an increase on RM296.7m, over one year. However, it also had RM236.7m in cash, and so its net debt is RM133.3m.

A Look At Matrix Concepts Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Matrix Concepts Holdings Berhad had liabilities of RM547.2m due within 12 months and liabilities of RM248.3m due beyond that. Offsetting these obligations, it had cash of RM236.7m as well as receivables valued at RM340.9m due within 12 months. So it has liabilities totalling RM217.9m more than its cash and near-term receivables, combined.

Given Matrix Concepts Holdings Berhad has a market capitalization of RM1.43b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Matrix Concepts Holdings Berhad's net debt is only 0.40 times its EBITDA. And its EBIT covers its interest expense a whopping 858 times over. So we're pretty relaxed about its super-conservative use of debt. The good news is that Matrix Concepts Holdings Berhad has increased its EBIT by 9.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Matrix Concepts Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Matrix Concepts Holdings Berhad recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Matrix Concepts Holdings Berhad's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Looking at all the aforementioned factors together, it strikes us that Matrix Concepts Holdings Berhad can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. To that end, you should be aware of the 1 warning sign we've spotted with Matrix Concepts Holdings Berhad .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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