Does M K Land Holdings Berhad (KLSE:MKLAND) 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.' 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 the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for M K Land Holdings Berhad

How Much Debt Does M K Land Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that M K Land Holdings Berhad had debt of RM30.5m at the end of September 2020, a reduction from RM48.1m over a year. But on the other hand it also has RM50.3m in cash, leading to a RM19.8m net cash position.

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

We can see from the most recent balance sheet that M K Land Holdings Berhad had liabilities of RM294.6m falling due within a year, and liabilities of RM120.5m due beyond that. Offsetting these obligations, it had cash of RM50.3m as well as receivables valued at RM121.1m due within 12 months. So its liabilities total RM243.7m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM192.7m, 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.

Although M K Land Holdings Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM19m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While M K Land Holdings Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent year, M K Land Holdings Berhad recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While M K Land Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM19.8m. So although we see some areas for improvement, we're not too worried about M K Land Holdings Berhad's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with M K Land Holdings Berhad (including 1 which makes us a bit uncomfortable) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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