Is MMAG Holdings Berhad (KLSE:MMAG) Using Debt In A Risky Way?

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 note that MMAG Holdings Berhad (KLSE:MMAG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for MMAG Holdings Berhad

What Is MMAG Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 MMAG Holdings Berhad had debt of RM23.4m, up from RM7.13m in one year. However, it also had RM22.5m in cash, and so its net debt is RM810.0k.

How Healthy Is MMAG Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MMAG Holdings Berhad had liabilities of RM172.3m due within 12 months and liabilities of RM255.4m due beyond that. Offsetting these obligations, it had cash of RM22.5m as well as receivables valued at RM69.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM336.1m.

The deficiency here weighs heavily on the RM102.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, MMAG Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. MMAG Holdings Berhad may have virtually no net debt, but it does have a lot of liabilities. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since MMAG Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year MMAG Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 73%, to RM385m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate MMAG Holdings Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping RM23m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of RM21m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. Be aware that MMAG Holdings Berhad is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.