Would Malaysian Bulk Carriers Berhad (KLSE:MAYBULK) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

View our latest analysis for Malaysian Bulk Carriers Berhad

What Is Malaysian Bulk Carriers Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Malaysian Bulk Carriers Berhad had RM240.7m of debt in December 2020, down from RM359.6m, one year before. However, it does have RM38.9m in cash offsetting this, leading to net debt of about RM201.8m.

A Look At Malaysian Bulk Carriers Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Malaysian Bulk Carriers Berhad had liabilities of RM182.0m due within 12 months and liabilities of RM195.9m due beyond that. Offsetting these obligations, it had cash of RM38.9m as well as receivables valued at RM23.6m due within 12 months. So it has liabilities totalling RM315.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Malaysian Bulk Carriers Berhad is worth RM585.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Malaysian Bulk Carriers Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Malaysian Bulk Carriers Berhad made a loss at the EBIT level, and saw its revenue drop to RM176m, which is a fall of 32%. That makes us nervous, to say the least.

Caveat Emptor

While Malaysian Bulk Carriers Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost RM1.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of RM21m. So in short it's a really risky stock. For riskier companies like Malaysian Bulk Carriers Berhad I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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