Malaysian Pacific Industries Berhad (KLSE:MPI) Has A Pretty 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. We can see that Malaysian Pacific Industries Berhad (KLSE:MPI) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Malaysian Pacific Industries Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Malaysian Pacific Industries Berhad had RM251.7m of debt, an increase on RM193.3m, over one year. But it also has RM1.05b in cash to offset that, meaning it has RM801.4m net cash.

A Look At Malaysian Pacific Industries Berhad's Liabilities

The latest balance sheet data shows that Malaysian Pacific Industries Berhad had liabilities of RM543.5m due within a year, and liabilities of RM108.2m falling due after that. Offsetting these obligations, it had cash of RM1.05b as well as receivables valued at RM318.9m due within 12 months. So it can boast RM720.2m 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!

In fact Malaysian Pacific Industries Berhad's saving grace is its low debt levels, because its EBIT has tanked 75% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Malaysian Pacific Industries 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. Looking at the most recent three years, Malaysian Pacific Industries Berhad recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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 RM801.4m, as well as more liquid assets than liabilities. So we don't have any problem with Malaysian Pacific Industries Berhad's use of debt. 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. Case in point: We've spotted 1 warning sign for Malaysian Pacific Industries Berhad 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.

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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.