Stock Analysis

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

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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Metronic Global Berhad (KLSE:MTRONIC) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Metronic Global Berhad

What Is Metronic Global Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Metronic Global Berhad had RM7.93m of debt in December 2022, down from RM9.30m, one year before. But it also has RM134.4m in cash to offset that, meaning it has RM126.4m net cash.

KLSE:MTRONIC Debt to Equity History March 15th 2023

A Look At Metronic Global Berhad's Liabilities

According to the last reported balance sheet, Metronic Global Berhad had liabilities of RM23.2m due within 12 months, and liabilities of RM189.7k due beyond 12 months. Offsetting these obligations, it had cash of RM134.4m as well as receivables valued at RM26.2m due within 12 months. So it can boast RM137.2m 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). 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Metronic Global Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Metronic Global Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to RM47m. With any luck the company will be able to grow its way to profitability.

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 RM263k. 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. Given it also grew revenue by 47% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Metronic Global Berhad that you should be aware of.

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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