Does Malayan United Industries Berhad (KLSE:MUIIND) Have A Healthy Balance Sheet?

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 can see that Malayan United Industries Berhad (KLSE:MUIIND) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Malayan United Industries Berhad

How Much Debt Does Malayan United Industries Berhad Carry?

The chart below, which you can click on for greater detail, shows that Malayan United Industries Berhad had RM807.1m in debt in September 2020; about the same as the year before. However, because it has a cash reserve of RM232.2m, its net debt is less, at about RM574.9m.

A Look At Malayan United Industries Berhad's Liabilities

According to the last reported balance sheet, Malayan United Industries Berhad had liabilities of RM292.9m due within 12 months, and liabilities of RM704.8m due beyond 12 months. Offsetting this, it had RM232.2m in cash and RM140.8m in receivables that were due within 12 months. So it has liabilities totalling RM624.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the RM263.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Malayan United Industries Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Malayan United Industries Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Malayan United Industries Berhad had a loss before interest and tax, and actually shrunk its revenue by 34%, to RM256m. That makes us nervous, to say the least.

Caveat Emptor

While Malayan United Industries Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM34m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of RM193m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Malayan United Industries Berhad has 2 warning signs (and 1 which shouldn't be ignored) we think 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. 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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