Is Mun Siong Engineering (SGX:MF6) Weighed On By Its Debt Load?

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. We can see that Mun Siong Engineering Limited (SGX:MF6) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mun Siong Engineering

What Is Mun Siong Engineering's Net Debt?

As you can see below, at the end of December 2020, Mun Siong Engineering had S$5.06m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has S$37.7m in cash, leading to a S$32.7m net cash position.

How Healthy Is Mun Siong Engineering's Balance Sheet?

The latest balance sheet data shows that Mun Siong Engineering had liabilities of S$17.0m due within a year, and liabilities of S$8.29m falling due after that. Offsetting this, it had S$37.7m in cash and S$24.1m in receivables that were due within 12 months. So it actually has S$36.6m 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Mun Siong Engineering boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mun Siong Engineering will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Mun Siong Engineering had a loss before interest and tax, and actually shrunk its revenue by 33%, to S$47m. To be frank that doesn't bode well.

So How Risky Is Mun Siong Engineering?

Although Mun Siong Engineering had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of S$6.0m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. 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, 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. 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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