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

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.' 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, Mun Siong Engineering Limited (SGX:MF6) does carry debt. But is this debt a concern to shareholders?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mun Siong Engineering

What Is Mun Siong Engineering's Net Debt?

As you can see below, Mun Siong Engineering had S$4.66m of debt at December 2021, down from S$5.01m a year prior. However, it does have S$36.1m in cash offsetting this, leading to net cash of S$31.4m.

How Strong Is Mun Siong Engineering's Balance Sheet?

The latest balance sheet data shows that Mun Siong Engineering had liabilities of S$25.5m due within a year, and liabilities of S$6.39m falling due after that. Offsetting this, it had S$36.1m in cash and S$31.9m in receivables that were due within 12 months. So it can boast S$36.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Mun Siong Engineering's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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.

Although Mun Siong Engineering made a loss at the EBIT level, last year, it was also good to see that it generated S$1.0m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last year, Mun Siong Engineering burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Mun Siong Engineering has S$31.4m in net cash and a strong balance sheet. So we don't have any problem with Mun Siong Engineering's use of debt. 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 Mun Siong Engineering is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.