Melewar Industrial Group Berhad (KLSE: MELEWAR) has a somewhat strained balance sheet

David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Melewar Berhad industrial group (KLSE: MELEWAR) carries debt. But the most important question is: what risk does this debt create?

When Is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest review for Melewar Industrial Group Berhad

What is the net debt of Melewar Industrial Group Berhad?

You can click on the graph below for historical figures, but it shows that Melewar Industrial Group Berhad had a debt of RM 88.0 million in December 2020, up from RM 118.5 million a year earlier. But he also has RM 93.2 million in cash to compensate for this, which means he has a net cash position of RM 5.25 million.

KLSE: MELEWAR History of debt to equity May 28, 2021

How healthy is Melewar Industrial Group Berhad’s balance sheet?

The latest balance sheet data shows that Melewar Industrial Group Berhad had liabilities of RM 210.2 million due within one year, and RM 77.4 million liabilities due after that. In return, he had RM 93.2 million in cash and RM 115.7 million in receivables due within 12 months. So he has a liability totaling RM 78.6 million more than his cash and short-term receivables combined.

Melewar Industrial Group Berhad has a market cap of RM219.2 million, so it could most likely raise cash to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts. Despite its notable liabilities, Melewar Industrial Group Berhad has a net cash flow, so it is fair to say that it does not have a heavy debt load!

It is important to note that the EBIT of Melewar Industrial Group Berhad has fallen by 40% in the last twelve months. If this decline continues, then it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Melewar Industrial Group Berhad that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. Although Melewar Industrial Group Berhad has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is. this cash balance is built (or eroded). Over the past three years, Melewar Industrial Group Berhad has spent a lot of money. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.

In summary

Although Melewar Industrial Group Berhad’s balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has a net cash position of RM 5.25 million. Despite its cash flow, we believe Melewar Industrial Group Berhad appears to be struggling to increase EBIT, so we are wary of the stock. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. We have identified 3 warning signs with Melewar Industrial Group Berhad, and understanding them should be part of your investment process.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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About Keith Tatum

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