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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that My EG Berhad services (KLSE: MYEG) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for My EG Services Berhad
How much debt does my EG Services Berhad have?
The image below, which you can click for more details, shows My EG Services Berhad had a debt of RM 151.9 million at the end of June 2021, a reduction from RM 176.0 million. over a year. But on the other hand, he also has RM357.4million in cash which leads to a net cash position of RM205.5million.
A look at the responsibilities of My EG Services Berhad
According to the latest published balance sheet, My EG Services Berhad had liabilities of RM 236.3 million due within 12 months and liabilities of RM 112.8 million due beyond 12 months. In return, he had RM 357.4 million in cash and RM 311.7 million in receivables due within 12 months. So he can boast of having RM320.1 million more liquid assets than total Liabilities.
This surplus suggests that My EG Services Berhad has a prudent balance sheet and could probably eliminate its debt without too much difficulty. Simply put, the fact that My EG Services Berhad has more cash than debt is probably a good indication that it can safely manage its debt.
And we also warmly note that My EG Services Berhad increased its EBIT by 17% last year, which makes its debt more manageable. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the future profitability of the business will decide whether My EG Services Berhad can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. My EG Services Berhad may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Over the past three years, My EG Services Berhad’s free cash flow has been 45% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
In summary
While it is always a good idea to investigate a company’s debt, in this case My EG Services Berhad has RM205.5 million in net cash and a decent balance sheet. And we liked the appearance of the 17% year-over-year EBIT growth from last year. We therefore do not believe that the use of debt by My EG Services Berhad is risky. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for My EG Services Berhad (1 should not be ignored) you should be aware of this.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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