Genting Malaysia Berhad (KLSE:GENM) Has A Somewhat Strained Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Genting Malaysia Berhad (KLSE:GENM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Genting Malaysia Berhad

What Is Genting Malaysia Berhad’s Net Debt?

The chart below, which you can click on for greater detail, shows that Genting Malaysia Berhad had RM11.8b in debt in March 2023; about the same as the year before. However, it also had RM2.74b in cash, and so its net debt is RM9.11b.

How Healthy Is Genting Malaysia Berhad’s Balance Sheet?

The latest balance sheet data shows that Genting Malaysia Berhad had liabilities of RM3.85b due within a year, and liabilities of RM13.1b falling due after that. On the other hand, it had cash of RM2.74b and RM759.3m worth of receivables due within a year. So it has liabilities totalling RM13.4b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RM14.3b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Genting Malaysia Berhad has a debt to EBITDA ratio of 3.8 and its EBIT covered its interest expense 2.7 times. This suggests that while the debt levels are significant, we’d stop short of calling them problematic. However, the silver lining was that Genting Malaysia Berhad achieved a positive EBIT of RM1.2b in the last twelve months, an improvement on the prior year’s loss. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Genting Malaysia Berhad’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, Genting Malaysia Berhad actually produced more free cash flow than EBIT over the last year. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.

Our View

Neither Genting Malaysia Berhad’s ability to cover its interest expense with its EBIT nor its level of total liabilities gave us confidence in its ability to take on more debt. But the good news is it seems to be able to convert EBIT to free cash flow with ease. When we consider all the factors discussed, it seems to us that Genting Malaysia Berhad is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn’t really want to see it increase from here. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 2 warning signs for Genting Malaysia Berhad you should be aware of, and 1 of them is a bit concerning.

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. 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.