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

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MMAG Holdings Berhad

What Is MMAG Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that MMAG Holdings Berhad had RM15.4m of debt in March 2023, down from RM23.4m, one year before. But it also has RM28.6m in cash to offset that, meaning it has RM13.2m net cash.

How Strong Is MMAG Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that MMAG Holdings Berhad had liabilities of RM162.2m due within a year, and liabilities of RM288.0m falling due after that. Offsetting this, it had RM28.6m in cash and RM60.2m in receivables that were due within 12 months. So its liabilities total RM361.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM36.3m 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. 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. There's no doubt that we learn most about debt from the balance sheet. 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 9.4%, to RM422m. 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year MMAG Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RM17m and booked a RM74m accounting loss. With only RM13.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for MMAG Holdings Berhad (of which 4 are a bit unpleasant!) 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.