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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

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

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

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Mr D.I.Y. Group (M) Berhad had RM195.1m of debt, an increase on RM171.3m, over one year. But it also has RM227.1m in cash to offset that, meaning it has RM32.0m 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 RM650.2m due within 12 months and liabilities of RM1.20b due beyond that. Offsetting these obligations, it had cash of RM227.1m as well as receivables valued at RM154.0m due within 12 months. So it has liabilities totalling RM1.47b more than its cash and near-term receivables, combined.

Of course, Mr D.I.Y. Group (M) Berhad has a market capitalization of RM19.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mr D.I.Y. Group (M) Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Mr D.I.Y. Group (M) Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM32.0m. And it impressed us with free cash flow of RM645m, being 70% of its EBIT. So is Mr D.I.Y. Group (M) Berhad's debt a risk? It doesn't seem so to us. 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. 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.

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.

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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.