Is Malaysian Pacific Industries Berhad (KLSE:MPI) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Malaysian Pacific Industries Berhad (KLSE:MPI) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Malaysian Pacific Industries Berhad

How Much Debt Does Malaysian Pacific Industries Berhad Carry?

The chart below, which you can click on for greater detail, shows that Malaysian Pacific Industries Berhad had RM187.0m in debt in September 2023; about the same as the year before. But it also has RM1.06b in cash to offset that, meaning it has RM871.9m 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 RM458.9m due within a year, and liabilities of RM123.6m falling due after that. Offsetting this, it had RM1.06b in cash and RM327.2m in receivables that were due within 12 months. So it actually has RM803.6m more liquid assets than total liabilities.

This surplus suggests that Malaysian Pacific Industries Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Malaysian Pacific Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Malaysian Pacific Industries Berhad's saving grace is its low debt levels, because its EBIT has tanked 85% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Malaysian Pacific Industries Berhad's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Malaysian Pacific Industries Berhad's free cash flow amounted to 26% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 RM871.9m, as well as more liquid assets than liabilities. So we don't have any problem with Malaysian Pacific Industries Berhad's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Malaysian Pacific Industries Berhad .

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. 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.