Does mm2 Asia (SGX:1B0) use debt sensibly?


Howard Marks said 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 that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that mm2 Asia Ltd. (SGX:1B0) has a debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for mm2 Asia

What is mm2 Asia’s debt?

The image below, which you can click on for more details, shows that mm2 Asia had a debt of S$215.7 million at the end of September 2021, a reduction from S$264.6 million on a year. However, since it has a cash reserve of S$30.4 million, its net debt is less, at around S$185.3 million.

SGX: 1B0 Debt to Equity History February 17, 2022

A look at the liabilities of mm2 Asia

Zooming in on the latest balance sheet data, we can see that mm2 Asia had liabilities of S$271.8 million due within 12 months and liabilities of S$123.0 million due beyond. On the other hand, it had cash of S$30.4 million and S$87.8 million of receivables due within one year. Thus, its liabilities total S$276.6 million more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the S$141.9 million business itself, like a child struggling under the weight of a huge backpack full of books, his sports gear and a trumpet. We would therefore be watching his balance sheet closely, no doubt. Ultimately, mm2 Asia would likely need a significant recapitalization if its creditors demanded 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 mm2 Asia 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.

Over 12 months, mm2 Asia recorded a loss in EBIT, and saw its turnover fall to S$102 million, a drop of 27%. To be honest, that doesn’t bode well.

Caveat Emptor

Not only has mm2 Asia’s revenue fallen over the past twelve months, it has also produced negative earnings before interest and tax (EBIT). Its EBIT loss was S$31 million. Considering that, along with the liabilities mentioned above, we are nervous about the business. It would have to quickly improve its functioning so that we are interested in it. It’s fair to say that the loss of S$80m didn’t cheer us up either; we would like to see a profit. In the meantime, we consider the stock to be risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. We have identified 1 warning sign with mm2 Asia, and understanding them should be part of your investment process.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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.


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