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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Metronic Global Berhad (KLSE:MTRONIC) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Metronic Global Berhad Carry?

The image below, which you can click on for greater detail, shows that at October 2024 Metronic Global Berhad had debt of RM11.5m, up from RM9.35m in one year. However, its balance sheet shows it holds RM136.3m in cash, so it actually has RM124.8m net cash.

A Look At Metronic Global Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Metronic Global Berhad had liabilities of RM35.0m due within 12 months and liabilities of RM122.1k due beyond that. Offsetting these obligations, it had cash of RM136.3m as well as receivables valued at RM14.0m due within 12 months. So it actually has RM115.2m 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. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Metronic Global 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.

Check out our latest analysis for Metronic Global Berhad

In the last year Metronic Global Berhad had a loss before interest and tax, and actually shrunk its revenue by 22%, to RM27m. That makes us nervous, to say the least.

So How Risky Is Metronic Global Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Metronic Global Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM6.8m and booked a RM22m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of RM124.8m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 2 warning signs for Metronic Global Berhad that you should be aware of before investing here.

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. 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.