Here's Why My E.G. Services Berhad (KLSE:MYEG) Can Manage Its Debt Responsibly

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. We note that My E.G. Services Berhad (KLSE:MYEG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for My E.G. Services Berhad

How Much Debt Does My E.G. Services Berhad Carry?

The image below, which you can click on for greater detail, shows that My E.G. Services Berhad had debt of RM151.9m at the end of June 2021, a reduction from RM176.0m over a year. But on the other hand it also has RM357.4m in cash, leading to a RM205.5m net cash position.

A Look At My E.G. Services Berhad's Liabilities

According to the last reported balance sheet, My E.G. Services Berhad had liabilities of RM236.3m due within 12 months, and liabilities of RM112.8m due beyond 12 months. Offsetting this, it had RM357.4m in cash and RM311.7m in receivables that were due within 12 months. So it can boast RM320.1m more liquid assets than total liabilities.

This surplus suggests that My E.G. Services Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that My E.G. Services Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that My E.G. Services Berhad grew its EBIT by 17% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if My E.G. Services Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. My E.G. Services Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, My E.G. Services Berhad's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case My E.G. Services Berhad has RM205.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 17% year-on-year EBIT growth. So we don't think My E.G. Services Berhad's use of debt is risky. 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 instance, we've identified 2 warning signs for My E.G. Services Berhad (1 shouldn't be ignored) you should be aware of.

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.

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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