These 4 Measures Indicate That Mikro MSC Berhad (KLSE:MIKROMB) Is Using Debt Reasonably Well

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Mikro MSC Berhad (KLSE:MIKROMB) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mikro MSC Berhad

What Is Mikro MSC Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Mikro MSC Berhad had RM7.82m of debt in June 2023, down from RM8.30m, one year before. But on the other hand it also has RM25.2m in cash, leading to a RM17.4m net cash position.

How Strong Is Mikro MSC Berhad's Balance Sheet?

The latest balance sheet data shows that Mikro MSC Berhad had liabilities of RM12.4m due within a year, and liabilities of RM9.35m falling due after that. Offsetting this, it had RM25.2m in cash and RM25.0m in receivables that were due within 12 months. So it can boast RM28.5m more liquid assets than total liabilities.

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

It is just as well that Mikro MSC Berhad's load is not too heavy, because its EBIT was down 44% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mikro MSC Berhad's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Mikro MSC Berhad created free cash flow amounting to 19% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mikro MSC Berhad has RM17.4m in net cash and a decent-looking balance sheet. So we are not troubled with Mikro MSC Berhad's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Mikro MSC Berhad (1 is concerning!) 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. 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.