Does MMAG Holdings Berhad (KLSE:MMAG) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies MMAG Holdings Berhad (KLSE:MMAG) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for MMAG Holdings Berhad

What Is MMAG Holdings Berhad's Debt?

As you can see below, at the end of December 2022, MMAG Holdings Berhad had RM15.4m of debt, up from RM3.33m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM43.7m in cash, so it actually has RM28.3m net cash.

How Strong Is MMAG Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, MMAG Holdings Berhad had liabilities of RM196.0m due within 12 months, and liabilities of RM252.1m due beyond 12 months. Offsetting these obligations, it had cash of RM43.7m as well as receivables valued at RM96.5m due within 12 months. So it has liabilities totalling RM307.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM48.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, MMAG Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today. Given that MMAG Holdings Berhad has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since MMAG Holdings 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.

In the last year MMAG Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 6.2%, to RM389m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is MMAG Holdings Berhad?

Although MMAG Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM5.7m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for MMAG Holdings Berhad (of which 3 make us uncomfortable!) you should know about.

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.