Does MBM Resources Berhad (KLSE:MBMR) Have A Healthy Balance Sheet?

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 MBM Resources Berhad (KLSE:MBMR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MBM Resources Berhad

What Is MBM Resources Berhad's Net Debt?

As you can see below, MBM Resources Berhad had RM7.00m of debt at December 2020, down from RM35.9m a year prior. But on the other hand it also has RM271.0m in cash, leading to a RM264.0m net cash position.

How Strong Is MBM Resources Berhad's Balance Sheet?

The latest balance sheet data shows that MBM Resources Berhad had liabilities of RM144.0m due within a year, and liabilities of RM9.27m falling due after that. Offsetting these obligations, it had cash of RM271.0m as well as receivables valued at RM156.8m due within 12 months. So it can boast RM274.5m more liquid assets than total liabilities.

This surplus suggests that MBM Resources Berhad is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that MBM Resources Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Although MBM Resources Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM766k in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MBM Resources Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While MBM Resources 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 last year, MBM Resources Berhad actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case MBM Resources Berhad has RM264.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM75m, being 9,820% of its EBIT. So we don't think MBM Resources Berhad's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for MBM Resources Berhad you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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