Here's Why Mun Siong Engineering (SGX:MF6) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Mun Siong Engineering Limited (SGX:MF6) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Mun Siong Engineering

What Is Mun Siong Engineering's Net Debt?

As you can see below, at the end of June 2021, Mun Siong Engineering had S$5.00m of debt, up from S$19.0k a year ago. Click the image for more detail. But it also has S$35.3m in cash to offset that, meaning it has S$30.3m net cash.

How Healthy Is Mun Siong Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mun Siong Engineering had liabilities of S$16.8m due within 12 months and liabilities of S$7.45m due beyond that. On the other hand, it had cash of S$35.3m and S$22.4m worth of receivables due within a year. So it actually has S$33.5m more liquid assets than total liabilities.

This surplus strongly suggests that Mun Siong Engineering has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Mun Siong Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Mun Siong Engineering improved its EBIT from a last year's loss to a positive S$3.0k. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mun Siong Engineering'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mun Siong Engineering 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. Over the last year, Mun Siong Engineering saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that Mun Siong Engineering has net cash of S$30.3m and plenty of liquid assets. So we don't have any problem with Mun Siong Engineering's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Mun Siong Engineering (2 are a bit concerning!) that you should be aware of before investing here.

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.

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.

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