Mun Siong Engineering (SGX:MF6) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Mun Siong Engineering Limited (SGX:MF6) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mun Siong Engineering

What Is Mun Siong Engineering's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Mun Siong Engineering had S$5.01m of debt, an increase on none, over one year. But on the other hand it also has S$39.0m in cash, leading to a S$34.0m net cash position.

A Look At Mun Siong Engineering's Liabilities

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. On the other hand, it had cash of S$39.0m and S$21.7m worth of receivables due within a year. So it actually has S$35.4m 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. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mun Siong Engineering will need earnings to service that debt. 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.

Over 12 months, Mun Siong Engineering made a loss at the EBIT level, and saw its revenue drop to S$47m, which is a fall of 33%. That makes us nervous, to say the least.

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$5.9m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. 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 instance, we've identified 2 warning signs for Mun Siong Engineering (1 shouldn't be ignored) you should be aware of.

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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