Is Mi Technovation Berhad (KLSE:MI) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Mi Technovation Berhad (KLSE:MI) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mi Technovation Berhad

How Much Debt Does Mi Technovation Berhad Carry?

As you can see below, at the end of September 2020, Mi Technovation Berhad had RM26.7m of debt, up from RM4.84m a year ago. Click the image for more detail. But it also has RM29.2m in cash to offset that, meaning it has RM2.45m net cash.

How Healthy Is Mi Technovation Berhad's Balance Sheet?

We can see from the most recent balance sheet that Mi Technovation Berhad had liabilities of RM61.2m falling due within a year, and liabilities of RM4.18m due beyond that. Offsetting this, it had RM29.2m in cash and RM113.2m in receivables that were due within 12 months. So it can boast RM77.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Mi Technovation Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mi Technovation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Mi Technovation Berhad grew its EBIT at 19% 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 Mi Technovation Berhad can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mi Technovation Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Mi Technovation Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Mi Technovation Berhad has RM2.45m in net cash and a decent-looking balance sheet. And we liked the look of last year's 19% year-on-year EBIT growth. So we are not troubled with Mi Technovation Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Mi Technovation Berhad , and understanding them should be part of your investment process.

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. 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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