Is Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY) A Risky Investment?

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.' 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 Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Mr D.I.Y. Group (M) Berhad

What Is Mr D.I.Y. Group (M) Berhad's Debt?

As you can see below, at the end of March 2024, Mr D.I.Y. Group (M) Berhad had RM297.7m of debt, up from RM264.6m a year ago. Click the image for more detail. But it also has RM330.4m in cash to offset that, meaning it has RM32.7m net cash.

How Healthy Is Mr D.I.Y. Group (M) Berhad's Balance Sheet?

According to the last reported balance sheet, Mr D.I.Y. Group (M) Berhad had liabilities of RM735.6m due within 12 months, and liabilities of RM1.18b due beyond 12 months. Offsetting this, it had RM330.4m in cash and RM116.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM1.47b.

Since publicly traded Mr D.I.Y. Group (M) Berhad shares are worth a total of RM18.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Mr D.I.Y. Group (M) Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Mr D.I.Y. Group (M) Berhad grew its EBIT at 14% over the last year, further increasing its ability to manage debt. 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 Mr D.I.Y. Group (M) Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mr D.I.Y. Group (M) 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 most recent three years, Mr D.I.Y. Group (M) Berhad recorded free cash flow worth 67% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Mr D.I.Y. Group (M) Berhad has RM32.7m in net cash. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in RM706m. So is Mr D.I.Y. Group (M) Berhad's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Mr D.I.Y. Group (M) Berhad you should know about.

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. 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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