These 4 Measures Indicate That My E.G. Services Berhad (KLSE:MYEG) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 My E.G. Services Berhad (KLSE:MYEG) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

What Is My E.G. Services Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that My E.G. Services Berhad had debt of RM145.8m at the end of September 2021, a reduction from RM165.5m over a year. But on the other hand it also has RM375.7m in cash, leading to a RM229.9m 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 RM214.4m falling due within a year, and liabilities of RM106.4m due beyond that. Offsetting this, it had RM375.7m in cash and RM274.7m in receivables that were due within 12 months. So it actually has RM329.6m 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!

Also good is that My E.G. Services Berhad grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, My E.G. Services Berhad recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that My E.G. Services Berhad has net cash of RM229.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for My E.G. Services Berhad you should be aware of, and 1 of them makes us a bit uncomfortable.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.