Is Malaysian Pacific Industries Berhad (KLSE:MPI) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Malaysian Pacific Industries Berhad (KLSE:MPI) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Malaysian Pacific Industries Berhad

How Much Debt Does Malaysian Pacific Industries Berhad Carry?

As you can see below, at the end of March 2022, Malaysian Pacific Industries Berhad had RM196.2m of debt, up from RM82.9m a year ago. Click the image for more detail. However, it does have RM1.05b in cash offsetting this, leading to net cash of RM848.8m.

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

The latest balance sheet data shows that Malaysian Pacific Industries Berhad had liabilities of RM658.4m due within a year, and liabilities of RM222.0m falling due after that. On the other hand, it had cash of RM1.05b and RM362.9m worth of receivables due within a year. So it actually has RM527.5m 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. Simply put, the fact that Malaysian Pacific Industries Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Malaysian Pacific Industries Berhad grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 32% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Malaysian Pacific Industries Berhad has RM848.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 39% over the last year. So we don't think Malaysian Pacific Industries Berhad's use of debt is risky. 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. Be aware that Malaysian Pacific Industries Berhad is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.

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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.