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.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

As you can see below, M K Land Holdings Berhad had RM32.3m of debt at March 2021, down from RM50.8m a year prior. But on the other hand it also has RM64.1m in cash, leading to a RM31.8m net cash position.

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

According to the last reported balance sheet, M K Land Holdings Berhad had liabilities of RM271.1m due within 12 months, and liabilities of RM124.8m due beyond 12 months. Offsetting these obligations, it had cash of RM64.1m as well as receivables valued at RM123.3m due within 12 months. So its liabilities total RM208.5m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM253.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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.

Notably, M K Land Holdings Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM8.8m in 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although M K Land Holdings Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM31.8m. The cherry on top was that in converted 235% of that EBIT to free cash flow, bringing in RM21m. So we don't have any problem with M K Land Holdings Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with M K Land Holdings Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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