Does Mi Technovation Berhad (KLSE:MI) 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.' 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. We note that Mi Technovation Berhad (KLSE:MI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mi Technovation Berhad

What Is Mi Technovation Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Mi Technovation Berhad had debt of RM111.1m, up from RM26.7m in one year. However, it does have RM400.9m in cash offsetting this, leading to net cash of RM289.8m.

A Look At Mi Technovation Berhad's Liabilities

The latest balance sheet data shows that Mi Technovation Berhad had liabilities of RM101.0m due within a year, and liabilities of RM82.8m falling due after that. Offsetting this, it had RM400.9m in cash and RM213.0m in receivables that were due within 12 months. So it can boast RM430.0m more liquid assets than total liabilities.

This surplus suggests that Mi Technovation Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Mi Technovation Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Mi Technovation Berhad grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mi Technovation 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, a company can only pay off debt with cold hard cash, not accounting profits. Mi Technovation 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. During the last three years, Mi Technovation Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Mi Technovation Berhad has RM289.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 22% year-on-year EBIT growth. So we are not troubled with Mi Technovation Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for Mi Technovation Berhad you should know about.

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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