Is Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY) Using Too Much Debt?

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. As with many other companies Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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 Mr D.I.Y. Group (M) Berhad

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

You can click the graphic below for the historical numbers, but it shows that Mr D.I.Y. Group (M) Berhad had RM178.9m of debt in September 2023, down from RM228.0m, one year before. But it also has RM192.5m in cash to offset that, meaning it has RM13.6m net cash.

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

Zooming in on the latest balance sheet data, we can see that Mr D.I.Y. Group (M) Berhad had liabilities of RM628.5m due within 12 months and liabilities of RM1.19b due beyond that. On the other hand, it had cash of RM192.5m and RM123.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM1.50b.

Of course, Mr D.I.Y. Group (M) Berhad has a market capitalization of RM13.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mr D.I.Y. Group (M) Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Mr D.I.Y. Group (M) Berhad grew its EBIT at 16% 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 61% 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

Although Mr D.I.Y. Group (M) 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 RM13.6m. And we liked the look of last year's 16% year-on-year EBIT growth. So is Mr D.I.Y. Group (M) Berhad's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Mr D.I.Y. Group (M) Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.