Here's Why Mesiniaga Berhad (KLSE:MSNIAGA) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Mesiniaga Berhad (KLSE:MSNIAGA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Mesiniaga Berhad

What Is Mesiniaga Berhad's Debt?

As you can see below, at the end of June 2022, Mesiniaga Berhad had RM24.6m of debt, up from RM7.24m a year ago. Click the image for more detail. But on the other hand it also has RM45.2m in cash, leading to a RM20.6m net cash position.

How Healthy Is Mesiniaga Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mesiniaga Berhad had liabilities of RM113.3m due within 12 months and liabilities of RM6.78m due beyond that. Offsetting these obligations, it had cash of RM45.2m as well as receivables valued at RM128.2m due within 12 months. So it actually has RM53.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Mesiniaga Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Mesiniaga Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Mesiniaga Berhad turned things around in the last 12 months, delivering and EBIT of RM9.8m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mesiniaga 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Mesiniaga Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Mesiniaga Berhad recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mesiniaga Berhad has RM20.6m in net cash and a decent-looking balance sheet. So is Mesiniaga Berhad's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Mesiniaga Berhad , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.