Is mDR (SGX:A27) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, mDR Limited (SGX:A27) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for mDR

What Is mDR's Debt?

As you can see below, mDR had S$35.7m of debt at June 2020, down from S$44.6m a year prior. However, its balance sheet shows it holds S$39.2m in cash, so it actually has S$3.47m net cash.

How Strong Is mDR's Balance Sheet?

We can see from the most recent balance sheet that mDR had liabilities of S$53.3m falling due within a year, and liabilities of S$2.72m due beyond that. Offsetting these obligations, it had cash of S$39.2m as well as receivables valued at S$19.3m due within 12 months. So it can boast S$2.52m more liquid assets than total liabilities.

This surplus suggests that mDR has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that mDR has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, mDR's EBIT fell a jaw-dropping 28% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is mDR'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. mDR 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. During the last three years, mDR generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that mDR has net cash of S$3.47m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of S$21m, being 89% of its EBIT. So we are not troubled with mDR's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with mDR , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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