Is Malayan United Industries Berhad (KLSE:MUIIND) Using Debt Sensibly?

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. Importantly, Malayan United Industries Berhad (KLSE:MUIIND) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Malayan United Industries Berhad

How Much Debt Does Malayan United Industries Berhad Carry?

As you can see below, Malayan United Industries Berhad had RM836.1m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM204.6m in cash leading to net debt of about RM631.5m.

How Healthy Is Malayan United Industries Berhad's Balance Sheet?

We can see from the most recent balance sheet that Malayan United Industries Berhad had liabilities of RM258.3m falling due within a year, and liabilities of RM841.8m due beyond that. Offsetting these obligations, it had cash of RM204.6m as well as receivables valued at RM147.7m due within 12 months. So it has liabilities totalling RM747.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM234.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Malayan United Industries Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Malayan United Industries Berhad's earnings that will influence how the balance sheet holds up in the future. 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 39%, to RM183m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Malayan United Industries Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM82m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through RM25m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. We've identified 3 warning signs with Malayan United Industries Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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