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

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. We note that Malaysian Pacific Industries Berhad (KLSE:MPI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Malaysian Pacific Industries Berhad

How Much Debt Does Malaysian Pacific Industries Berhad Carry?

The image below, which you can click on for greater detail, shows that Malaysian Pacific Industries Berhad had debt of RM92.2m at the end of June 2024, a reduction from RM251.7m over a year. But on the other hand it also has RM1.09b in cash, leading to a RM1.00b net cash position.

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

According to the last reported balance sheet, Malaysian Pacific Industries Berhad had liabilities of RM452.0m due within 12 months, and liabilities of RM41.9m due beyond 12 months. Offsetting these obligations, it had cash of RM1.09b as well as receivables valued at RM324.0m due within 12 months. So it actually has RM925.0m more liquid assets than total liabilities.

It's good to see that Malaysian Pacific Industries Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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.

Better yet, Malaysian Pacific Industries Berhad grew its EBIT by 112% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Malaysian Pacific Industries Berhad produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Malaysian Pacific Industries Berhad has RM1.00b in net cash and a decent-looking balance sheet. And we liked the look of last year's 112% year-on-year EBIT growth. So is Malaysian Pacific Industries Berhad's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Malaysian Pacific Industries Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.