Microlink Solutions Berhad (KLSE:MICROLN) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Microlink Solutions Berhad (KLSE:MICROLN) makes use of debt. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Microlink Solutions Berhad

What Is Microlink Solutions Berhad's Net Debt?

As you can see below, Microlink Solutions Berhad had RM18.2m of debt at September 2020, down from RM21.6m a year prior. However, its balance sheet shows it holds RM26.5m in cash, so it actually has RM8.27m net cash.

How Strong Is Microlink Solutions Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Microlink Solutions Berhad had liabilities of RM97.5m due within 12 months and liabilities of RM4.86m due beyond that. On the other hand, it had cash of RM26.5m and RM72.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM3.04m.

This state of affairs indicates that Microlink Solutions Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the RM612.7m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Microlink Solutions Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Microlink Solutions Berhad has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Microlink Solutions 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Microlink Solutions Berhad actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Microlink Solutions Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM8.27m. And it impressed us with free cash flow of RM30m, being 155% of its EBIT. So is Microlink Solutions Berhad's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Microlink Solutions Berhad .

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.

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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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