Does Majuperak Holdings Berhad (KLSE:MJPERAK) Have A Healthy Balance Sheet?

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

When Is Debt Dangerous?

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

View our latest analysis for Majuperak Holdings Berhad

What Is Majuperak Holdings Berhad's Net Debt?

As you can see below, at the end of September 2020, Majuperak Holdings Berhad had RM12.4m of debt, up from RM11.7m a year ago. Click the image for more detail. However, it does have RM1.53m in cash offsetting this, leading to net debt of about RM10.8m.

How Strong Is Majuperak Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Majuperak Holdings Berhad had liabilities of RM53.9m falling due within a year, and liabilities of RM24.7m due beyond that. Offsetting this, it had RM1.53m in cash and RM48.4m in receivables that were due within 12 months. So it has liabilities totalling RM28.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Majuperak Holdings Berhad is worth RM106.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to RM17m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Majuperak Holdings Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at RM7.7m. 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. Another cause for caution is that is bled RM5.4m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Like risks, for instance. Every company has them, and we've spotted 6 warning signs for Majuperak Holdings Berhad (of which 2 shouldn't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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