Does MTQ (SGX:M05) Have A Healthy Balance Sheet?

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.' 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 MTQ Corporation Limited (SGX:M05) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for MTQ

What Is MTQ's Net Debt?

The image below, which you can click on for greater detail, shows that MTQ had debt of S$14.0m at the end of September 2020, a reduction from S$21.4m over a year. But on the other hand it also has S$19.2m in cash, leading to a S$5.11m net cash position.

How Strong Is MTQ's Balance Sheet?

The latest balance sheet data shows that MTQ had liabilities of S$13.5m due within a year, and liabilities of S$23.1m falling due after that. On the other hand, it had cash of S$19.2m and S$17.1m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that MTQ's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the S$46.5m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, MTQ boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, MTQ is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 154% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is MTQ'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. MTQ may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, MTQ actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MTQ has S$5.11m in net cash. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in S$8.7m. So is MTQ's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for MTQ you should know about.

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.

If you’re looking to trade MTQ, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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