Mesiniaga Berhad (KLSE:MSNIAGA) Seems To Use Debt Quite Sensibly

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 can see that Mesiniaga Berhad (KLSE:MSNIAGA) does use debt in its business. 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. 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. 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.

See our latest analysis for Mesiniaga Berhad

What Is Mesiniaga Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Mesiniaga Berhad had debt of RM11.5m at the end of September 2020, a reduction from RM12.3m over a year. But on the other hand it also has RM24.9m in cash, leading to a RM13.3m net cash position.

How Healthy Is Mesiniaga Berhad's Balance Sheet?

According to the last reported balance sheet, Mesiniaga Berhad had liabilities of RM56.9m due within 12 months, and liabilities of RM4.45m due beyond 12 months. Offsetting these obligations, it had cash of RM24.9m as well as receivables valued at RM94.3m due within 12 months. So it actually has RM57.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Mesiniaga Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Mesiniaga Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Mesiniaga Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM7.9m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Mesiniaga 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.

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. In the last year, Mesiniaga Berhad created free cash flow amounting to 5.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Mesiniaga Berhad has RM13.3m in net cash and a decent-looking balance sheet. So we don't think Mesiniaga Berhad's use of debt is risky. 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. For instance, we've identified 1 warning sign for Mesiniaga Berhad that you should be aware of.

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. 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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