Does Malaysian Pacific Industries Berhad (KLSE:MPI) Have A Healthy Balance Sheet?

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.' 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. Importantly, Malaysian Pacific Industries Berhad (KLSE:MPI) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Malaysian Pacific Industries Berhad

How Much Debt Does Malaysian Pacific Industries Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Malaysian Pacific Industries Berhad had debt of RM129.6m, up from RM20.8m in one year. But it also has RM1.04b in cash to offset that, meaning it has RM914.2m net cash.

How Strong Is Malaysian Pacific Industries Berhad's Balance Sheet?

The latest balance sheet data shows that Malaysian Pacific Industries Berhad had liabilities of RM588.8m due within a year, and liabilities of RM83.0m falling due after that. On the other hand, it had cash of RM1.04b and RM328.0m worth of receivables due within a year. So it can boast RM700.0m more liquid assets than total liabilities.

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

On top of that, Malaysian Pacific Industries Berhad grew its EBIT by 78% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Malaysian Pacific Industries 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Malaysian Pacific Industries 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. Over the most recent three years, Malaysian Pacific Industries Berhad recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Malaysian Pacific Industries Berhad has net cash of RM914.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 78% over the last year. So is Malaysian Pacific Industries Berhad's debt a risk? It doesn't seem so to us. 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 2 warning signs for Malaysian Pacific Industries Berhad (of which 1 is a bit unpleasant!) you should know about.

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.

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

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.