Health Check: How Prudently Does MMag Holdings Berhad (KLSE:MMAG) Use Debt?

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 MMag Holdings Berhad (KLSE:MMAG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, 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 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 MMag Holdings Berhad

What Is MMag Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 MMag Holdings Berhad had debt of RM18.2m, up from RM3.99m in one year. However, it does have RM39.9m in cash offsetting this, leading to net cash of RM21.6m.

How Healthy Is MMag Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that MMag Holdings Berhad had liabilities of RM57.6m due within a year, and liabilities of RM17.5m falling due after that. On the other hand, it had cash of RM39.9m and RM50.0m worth of receivables due within a year. So it can boast RM14.8m more liquid assets than total liabilities.

This surplus suggests that MMag Holdings Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, MMag Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, MMag Holdings Berhad reported revenue of RM193m, which is a gain of 90%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is MMag Holdings Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months MMag Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM16m and booked a RM26m accounting loss. With only RM21.6m on the balance sheet, it would appear that its going to need to raise capital again soon. MMag Holdings Berhad's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for MMag Holdings Berhad you should be aware of, and 2 of them are a bit concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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