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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Mi Technovation Berhad (KLSE:MI) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mi Technovation Berhad

How Much Debt Does Mi Technovation Berhad Carry?

As you can see below, at the end of March 2021, Mi Technovation Berhad had RM20.9m of debt, up from RM3.61m a year ago. Click the image for more detail. But it also has RM109.9m in cash to offset that, meaning it has RM89.0m net cash.

How Strong Is Mi Technovation Berhad's Balance Sheet?

The latest balance sheet data shows that Mi Technovation Berhad had liabilities of RM59.0m due within a year, and liabilities of RM22.5m falling due after that. Offsetting these obligations, it had cash of RM109.9m as well as receivables valued at RM116.1m due within 12 months. So it actually has RM144.6m 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. 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.

But the other side of the story is that Mi Technovation Berhad saw its EBIT decline by 6.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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'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. 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. 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 RM89.0m in net cash and a decent-looking balance sheet. So we are not troubled with Mi Technovation Berhad's debt use. 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 instance, we've identified 4 warning signs for Mi Technovation Berhad (1 is a bit concerning) you should be aware of.

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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.