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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Metronic Global Berhad (KLSE:MTRONIC) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Metronic Global Berhad

What Is Metronic Global Berhad's Debt?

The image below, which you can click on for greater detail, shows that Metronic Global Berhad had debt of RM9.07m at the end of March 2021, a reduction from RM9.49m over a year. However, it does have RM67.0m in cash offsetting this, leading to net cash of RM57.9m.

How Strong Is Metronic Global Berhad's Balance Sheet?

According to the balance sheet data, Metronic Global Berhad had liabilities of RM30.0m due within 12 months, but no longer term liabilities. On the other hand, it had cash of RM67.0m and RM47.9m worth of receivables due within a year. So it can boast RM84.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that Metronic Global Berhad's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Metronic Global Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Metronic Global Berhad's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Metronic Global Berhad made a loss at the EBIT level, and saw its revenue drop to RM22m, which is a fall of 22%. That makes us nervous, to say the least.

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 RM12m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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 4 warning signs with Metronic Global Berhad (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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