These 4 Measures Indicate That Malaysian Pacific Industries Berhad (KLSE:MPI) Is Using Debt Reasonably Well

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.' 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?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Malaysian Pacific Industries Berhad

What Is Malaysian Pacific Industries Berhad's Debt?

As you can see below, Malaysian Pacific Industries Berhad had RM120.9m of debt at March 2024, down from RM242.3m a year prior. But on the other hand it also has RM1.08b in cash, leading to a RM958.1m net cash position.

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

The latest balance sheet data shows that Malaysian Pacific Industries Berhad had liabilities of RM417.1m due within a year, and liabilities of RM55.8m falling due after that. Offsetting these obligations, it had cash of RM1.08b as well as receivables valued at RM334.9m due within 12 months. So it actually has RM941.0m 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. 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.

It is just as well that Malaysian Pacific Industries Berhad's load is not too heavy, because its EBIT was down 35% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Looking at the most recent three years, Malaysian Pacific Industries Berhad recorded free cash flow of 45% 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 RM958.1m in net cash and a decent-looking balance sheet. So we are not troubled with Malaysian Pacific Industries Berhad's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Malaysian Pacific Industries Berhad's earnings per share history for free.

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.

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