We Think Mun Siong Engineering (SGX:MF6) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Mun Siong Engineering Limited (SGX:MF6) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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

How Much Debt Does Mun Siong Engineering Carry?

The image below, which you can click on for greater detail, shows that Mun Siong Engineering had debt of S$3.44m at the end of December 2022, a reduction from S$4.66m over a year. However, it does have S$30.3m in cash offsetting this, leading to net cash of S$26.8m.

How Healthy Is Mun Siong Engineering's Balance Sheet?

We can see from the most recent balance sheet that Mun Siong Engineering had liabilities of S$13.6m falling due within a year, and liabilities of S$5.37m due beyond that. Offsetting these obligations, it had cash of S$30.3m as well as receivables valued at S$18.0m due within 12 months. So it can boast S$29.3m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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.

It is just as well that Mun Siong Engineering's load is not too heavy, because its EBIT was down 83% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 two years, 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, you should keep in mind that Mun Siong Engineering has net cash of S$26.8m, as well as more liquid assets than liabilities. So we are not troubled with Mun Siong Engineering's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Mun Siong Engineering you should be aware of.

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.