We Think Multi-Chem (SGX:AWZ) Can Manage Its Debt With Ease

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.' 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. As with many other companies Multi-Chem Limited (SGX:AWZ) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Multi-Chem

What Is Multi-Chem's Net Debt?

The chart below, which you can click on for greater detail, shows that Multi-Chem had S$3.30m in debt in June 2022; about the same as the year before. However, it does have S$72.4m in cash offsetting this, leading to net cash of S$69.1m.

A Look At Multi-Chem's Liabilities

The latest balance sheet data shows that Multi-Chem had liabilities of S$172.2m due within a year, and liabilities of S$14.5m falling due after that. Offsetting this, it had S$72.4m in cash and S$159.4m in receivables that were due within 12 months. So it actually has S$45.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Multi-Chem's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Multi-Chem has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Multi-Chem has increased its EBIT by 4.3% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Multi-Chem will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Multi-Chem 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. During the last three years, Multi-Chem generated free cash flow amounting to a very robust 86% 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 Multi-Chem has net cash of S$69.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of S$45m, being 86% of its EBIT. So we don't think Multi-Chem's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Multi-Chem that 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. 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.