Is mm2 Asia (SGX:1B0) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, mm2 Asia Ltd. (SGX:1B0) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for mm2 Asia

How Much Debt Does mm2 Asia Carry?

As you can see below, mm2 Asia had S$264.6m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have S$11.1m in cash offsetting this, leading to net debt of about S$253.5m.

How Healthy Is mm2 Asia's Balance Sheet?

The latest balance sheet data shows that mm2 Asia had liabilities of S$304.0m due within a year, and liabilities of S$155.3m falling due after that. Offsetting these obligations, it had cash of S$11.1m as well as receivables valued at S$127.2m due within 12 months. So its liabilities total S$321.1m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the S$139.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, mm2 Asia would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if mm2 Asia can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year mm2 Asia had a loss before interest and tax, and actually shrunk its revenue by 49%, to S$138m. That makes us nervous, to say the least.

Caveat Emptor

Not only did mm2 Asia's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable S$18m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of S$28m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. For example mm2 Asia has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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