Does Malaysian Bulk Carriers Berhad (KLSE:MAYBULK) Have A Healthy Balance Sheet?

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. As with many other companies Malaysian Bulk Carriers Berhad (KLSE:MAYBULK) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Malaysian Bulk Carriers Berhad

How Much Debt Does Malaysian Bulk Carriers Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Malaysian Bulk Carriers Berhad had RM66.7m of debt in December 2021, down from RM240.7m, one year before. However, its balance sheet shows it holds RM207.2m in cash, so it actually has RM140.4m net cash.

How Healthy Is Malaysian Bulk Carriers Berhad's Balance Sheet?

The latest balance sheet data shows that Malaysian Bulk Carriers Berhad had liabilities of RM68.5m due within a year, and liabilities of RM90.1m falling due after that. On the other hand, it had cash of RM207.2m and RM9.50m worth of receivables due within a year. So it actually has RM58.1m more liquid assets than total liabilities.

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

It was also good to see that despite losing money on the EBIT line last year, Malaysian Bulk Carriers Berhad turned things around in the last 12 months, delivering and EBIT of RM84m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Malaysian Bulk Carriers 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. While Malaysian Bulk Carriers 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. Happily for any shareholders, Malaysian Bulk Carriers Berhad actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Malaysian Bulk Carriers Berhad has RM140.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 160% of that EBIT to free cash flow, bringing in RM135m. So is Malaysian Bulk Carriers 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Malaysian Bulk Carriers Berhad 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.