We Think Malaysian Pacific Industries Berhad (KLSE:MPI) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Malaysian Pacific Industries Berhad (KLSE:MPI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 Malaysian Pacific Industries Berhad had RM140.7m of debt in December 2024, down from RM165.0m, one year before. But it also has RM1.11b in cash to offset that, meaning it has RM967.3m net cash.

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

Zooming in on the latest balance sheet data, we can see that Malaysian Pacific Industries Berhad had liabilities of RM407.8m due within 12 months and liabilities of RM124.6m due beyond that. Offsetting these obligations, it had cash of RM1.11b as well as receivables valued at RM358.7m due within 12 months. So it can boast RM934.3m 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. Succinctly put, Malaysian Pacific Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Malaysian Pacific Industries Berhad grew its EBIT by 229% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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. Over the most recent three years, Malaysian Pacific Industries Berhad recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 RM967.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 229% year-on-year EBIT growth. So we don't think Malaysian Pacific Industries Berhad's use of debt is risky. 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.

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.