These 4 Measures Indicate That Excel Force MSC Berhad (KLSE:EFORCE) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Excel Force MSC Berhad (KLSE:EFORCE) does use debt in its business. But should shareholders be worried about its use of debt?

We've discovered 5 warning signs about Excel Force MSC Berhad. View them for free.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Excel Force MSC Berhad's Debt?

As you can see below, Excel Force MSC Berhad had RM6.66m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds RM26.4m in cash, so it actually has RM19.7m net cash.

How Strong Is Excel Force MSC Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Excel Force MSC Berhad had liabilities of RM10.1m due within 12 months and liabilities of RM9.60m due beyond that. Offsetting these obligations, it had cash of RM26.4m as well as receivables valued at RM26.6m due within 12 months. So it actually has RM33.2m more liquid assets than total liabilities.

This surplus suggests that Excel Force MSC Berhad is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Excel Force MSC Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Excel Force MSC Berhad

But the other side of the story is that Excel Force MSC Berhad saw its EBIT decline by 5.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Excel Force MSC Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Excel Force MSC 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. Over the last three years, Excel Force MSC Berhad saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Excel Force MSC Berhad has RM19.7m in net cash and a decent-looking balance sheet. So we are not troubled with Excel Force MSC Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Excel Force MSC Berhad you should be aware of, and 2 of them are a bit concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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

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.