Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Marine and General Berhad (KLSE:M&G) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Marine & General Berhad
What is Marine & General Berhad’s debt?
As you can see below, Marine & General Berhad had a debt of RM733.4 million, as of January 2022, which is about the same as the previous year. You can click on the graph for more details. However, since he has a cash reserve of RM27.3 million, his net debt is lower at around RM706.1 million.
How strong is Marine & General Berhad’s balance sheet?
We can see from the most recent balance sheet that Marine & General Berhad had liabilities of RM104.8m due within one year, and liabilities of RM688.8m due beyond. In return, he had RM27.3 million in cash and RM54.9 million in debt due within 12 months. It therefore has liabilities totaling RM711.4 million more than its cash and short-term receivables, combined.
This deficit casts a shadow over the RM50.7m company, like a towering colossus of mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Marine & General Berhad would likely need a major recapitalization if its creditors were to demand repayment. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Marine & General Berhad can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
On a 12-month basis, Marine & General Berhad reported revenue of RM203 million, a gain of 3.3%, although it reported no earnings before interest and tax. We generally like to see faster growth from unprofitable businesses, but each in its own way.
Over the last twelve months, Marine & General Berhad has recorded a loss in earnings before interest and taxes (EBIT). Indeed, it lost a very considerable RM39 million in EBIT. When you combine that with the very large balance sheet liabilities mentioned above, we are so suspicious of it that we are basically at a loss for words. Of course, the company might have a great story about how it’s heading towards a brighter future. But the reality is that it lacks liquid assets compared to liabilities, and it lost RM44 million last year. We therefore believe that buying these shares is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 2 warning signs for Marine & General Berhad of which you should be aware.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.