Meridian Berhad (KLSE:MERIDIAN) 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.' 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 note that Meridian Berhad (KLSE:MERIDIAN) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Meridian Berhad

What Is Meridian Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Meridian Berhad had RM50.6m of debt in September 2020, down from RM54.8m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Meridian Berhad's Balance Sheet?

We can see from the most recent balance sheet that Meridian Berhad had liabilities of RM68.2m falling due within a year, and liabilities of RM27.2m due beyond that. Offsetting these obligations, it had cash of RM732.0k as well as receivables valued at RM9.66m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM85.0m.

This deficit isn't so bad because Meridian Berhad is worth RM202.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Meridian 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 Meridian Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to RM16m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Meridian Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost RM1.7m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of RM372k into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Meridian Berhad is showing 4 warning signs in our investment analysis , you should know about...

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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