Is Metronic Global Berhad (KLSE:MTRONIC) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Metronic Global Berhad (KLSE:MTRONIC) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Metronic Global Berhad

What Is Metronic Global Berhad's Net Debt?

As you can see below, Metronic Global Berhad had RM9.08m of debt at March 2021, down from RM9.49m a year prior. But on the other hand it also has RM67.0m in cash, leading to a RM57.9m net cash position.

A Look At Metronic Global Berhad's Liabilities

According to the balance sheet data, Metronic Global Berhad had liabilities of RM30.0m due within 12 months, but no longer term liabilities. Offsetting this, it had RM67.0m in cash and RM47.9m in receivables that were due within 12 months. So it actually has RM84.9m more liquid assets than total liabilities.

This surplus strongly suggests that Metronic Global Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Metronic Global Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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 although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Metronic Global Berhad (including 2 which shouldn't be ignored) .

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. 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.
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