These 4 Measures Indicate That MBM Resources Berhad (KLSE:MBMR) Is Using Debt Safely

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.' 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. We note that MBM Resources Berhad (KLSE:MBMR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for MBM Resources Berhad

What Is MBM Resources Berhad's Debt?

As you can see below, MBM Resources Berhad had RM13.8m of debt at June 2023, down from RM22.2m a year prior. However, its balance sheet shows it holds RM267.3m in cash, so it actually has RM253.5m net cash.

A Look At MBM Resources Berhad's Liabilities

The latest balance sheet data shows that MBM Resources Berhad had liabilities of RM196.6m due within a year, and liabilities of RM8.20m falling due after that. Offsetting this, it had RM267.3m in cash and RM202.7m in receivables that were due within 12 months. So it actually has RM265.3m 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. Succinctly put, MBM Resources Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that MBM Resources Berhad saw its EBIT decline by 8.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Happily for any shareholders, MBM Resources Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MBM Resources Berhad has net cash of RM253.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM35m, being 299% of its EBIT. So we don't think MBM Resources Berhad's use of debt is risky. 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. For example MBM Resources Berhad has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.