Malaysian Pacific Industries Berhad (KLSE:MPI) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Malaysian Pacific Industries Berhad (KLSE:MPI) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Malaysian Pacific Industries Berhad

How Much Debt Does Malaysian Pacific Industries Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Malaysian Pacific Industries Berhad had RM174.8m of debt, an increase on RM49.7m, over one year. However, it does have RM1.06b in cash offsetting this, leading to net cash of RM889.6m.

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

We can see from the most recent balance sheet that Malaysian Pacific Industries Berhad had liabilities of RM712.2m falling due within a year, and liabilities of RM186.7m due beyond that. Offsetting this, it had RM1.06b in cash and RM359.5m in receivables that were due within 12 months. So it actually has RM525.0m 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. 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 69% over the last twelve months, and that growth will make it easier to handle its 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 Malaysian Pacific Industries 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. 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. Looking at the most recent three years, Malaysian Pacific Industries Berhad recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Malaysian Pacific Industries Berhad has RM889.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 69% over the last year. So we don't think Malaysian Pacific Industries Berhad's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Malaysian Pacific Industries Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.