Is MMAG Holdings Berhad (KLSE:MMAG) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that MMAG Holdings Berhad (KLSE:MMAG) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that MMAG is potentially overvalued!

What Is MMAG Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 MMAG Holdings Berhad had RM19.0m of debt, an increase on RM3.43m, over one year. However, it does have RM15.4m in cash offsetting this, leading to net debt of about RM3.64m.

A Look At MMAG Holdings Berhad's Liabilities

We can see from the most recent balance sheet that MMAG Holdings Berhad had liabilities of RM104.7m falling due within a year, and liabilities of RM280.6m due beyond that. Offsetting this, it had RM15.4m in cash and RM98.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM271.4m.

This deficit casts a shadow over the RM60.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, MMAG Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is MMAG Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, MMAG Holdings Berhad saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, MMAG Holdings Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM50m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through RM6.3m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. Be aware that MMAG Holdings Berhad is showing 4 warning signs in our investment analysis , and 3 of those shouldn't be ignored...

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. 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.