Health Check: How Prudently Does Metronic Global Berhad (KLSE:MTRONIC) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Metronic Global Berhad (KLSE:MTRONIC) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Metronic Global Berhad

How Much Debt Does Metronic Global Berhad Carry?

As you can see below, at the end of September 2020, Metronic Global Berhad had RM9.74m of debt, up from RM9.04m a year ago. Click the image for more detail. But it also has RM70.3m in cash to offset that, meaning it has RM60.6m net cash.

How Strong Is Metronic Global Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Metronic Global Berhad had liabilities of RM31.8m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of RM70.3m as well as receivables valued at RM17.9m due within 12 months. So it actually has RM56.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Metronic Global Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Metronic Global Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Metronic Global 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 Metronic Global Berhad had a loss before interest and tax, and actually shrunk its revenue by 39%, to RM18m. To be frank that doesn't bode well.

So How Risky Is Metronic Global Berhad?

Although Metronic Global Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM5.7m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Metronic Global Berhad has 5 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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