My E.G. Services Berhad (KLSE:MYEG) Has A Pretty Healthy Balance Sheet

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. 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?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for My E.G. Services Berhad

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

You can click the graphic below for the historical numbers, but it shows that My E.G. Services Berhad had RM158.7m of debt in March 2021, down from RM176.0m, one year before. But on the other hand it also has RM359.2m in cash, leading to a RM200.5m net cash position.

How Strong Is My E.G. Services Berhad's Balance Sheet?

We can see from the most recent balance sheet that My E.G. Services Berhad had liabilities of RM245.1m falling due within a year, and liabilities of RM118.8m due beyond that. Offsetting this, it had RM359.2m in cash and RM320.7m in receivables that were due within 12 months. So it can boast RM316.0m 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. Succinctly put, My E.G. Services Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that My E.G. Services Berhad grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine My E.G. Services Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While My E.G. Services Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, My E.G. Services Berhad's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case My E.G. Services Berhad has RM200.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 16% year-on-year EBIT growth. So is My E.G. Services Berhad's debt a risk? It doesn't seem so to us. 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 example, we've discovered 1 warning sign for My E.G. Services Berhad that you should be aware of before investing here.

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. 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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