Is Mikro MSC Berhad (KLSE:MIKROMB) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Mikro MSC Berhad (KLSE:MIKROMB) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mikro MSC Berhad

How Much Debt Does Mikro MSC Berhad Carry?

As you can see below, at the end of March 2024, Mikro MSC Berhad had RM7.42m of debt, up from RM6.69m a year ago. Click the image for more detail. But on the other hand it also has RM22.9m in cash, leading to a RM15.5m net cash position.

How Strong Is Mikro MSC Berhad's Balance Sheet?

According to the last reported balance sheet, Mikro MSC Berhad had liabilities of RM6.55m due within 12 months, and liabilities of RM8.74m due beyond 12 months. Offsetting these obligations, it had cash of RM22.9m as well as receivables valued at RM23.1m due within 12 months. So it actually has RM30.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Mikro MSC Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mikro MSC Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Mikro MSC Berhad grew its EBIT by 376% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mikro MSC Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Mikro MSC 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. Over the last three years, Mikro MSC Berhad recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mikro MSC Berhad has RM15.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 376% over the last year. So is Mikro MSC Berhad's debt a risk? It doesn't seem so to us. 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. Be aware that Mikro MSC Berhad is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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