Does Microlink Solutions Berhad (KLSE:MICROLN) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Microlink Solutions Berhad (KLSE:MICROLN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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.

View our latest analysis for Microlink Solutions Berhad

How Much Debt Does Microlink Solutions Berhad Carry?

The image below, which you can click on for greater detail, shows that Microlink Solutions Berhad had debt of RM15.1m at the end of December 2020, a reduction from RM17.2m over a year. But it also has RM18.6m in cash to offset that, meaning it has RM3.43m net cash.

How Healthy Is Microlink Solutions Berhad's Balance Sheet?

We can see from the most recent balance sheet that Microlink Solutions Berhad had liabilities of RM63.3m falling due within a year, and liabilities of RM4.73m due beyond that. Offsetting these obligations, it had cash of RM18.6m as well as receivables valued at RM75.8m due within 12 months. So it can boast RM26.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Microlink Solutions Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Microlink Solutions Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Microlink Solutions Berhad grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Microlink Solutions Berhad will need earnings to service that debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Microlink Solutions 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. In the last two years, Microlink Solutions Berhad created free cash flow amounting to 16% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Microlink Solutions Berhad has RM3.43m in net cash and a decent-looking balance sheet. And we liked the look of last year's 40% year-on-year EBIT growth. So we don't think Microlink Solutions Berhad's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Microlink Solutions Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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