Here's Why M K Land Holdings Berhad (KLSE:MKLAND) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that M K Land Holdings Berhad (KLSE:MKLAND) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

The image below, which you can click on for greater detail, shows that M K Land Holdings Berhad had debt of RM28.7m at the end of December 2020, a reduction from RM46.3m over a year. However, it does have RM53.2m in cash offsetting this, leading to net cash of RM24.6m.

A Look At M K Land Holdings Berhad's Liabilities

We can see from the most recent balance sheet that M K Land Holdings Berhad had liabilities of RM266.7m falling due within a year, and liabilities of RM120.7m due beyond that. Offsetting this, it had RM53.2m in cash and RM113.8m in receivables that were due within 12 months. So it has liabilities totalling RM220.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RM265.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, M K Land Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although M K Land Holdings Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM20m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since M K Land 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. M K Land Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, M K Land Holdings Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While M K Land Holdings Berhad does have more liabilities than liquid assets, it also has net cash of RM24.6m. And it impressed us with free cash flow of RM41m, being 201% of its EBIT. So we are not troubled with M K Land Holdings Berhad's debt use. 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. For example, we've discovered 5 warning signs for M K Land Holdings Berhad (1 is significant!) that you should be aware of before investing here.

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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