Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Murray Cod Australia Limited (ASX:MCA) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Murray Cod Australia Carry?
As you can see below, at the end of June 2022, Murray Cod Australia had AU$2.33m of debt, up from AU$33.9k a year ago. Click the image for more detail. But on the other hand it also has AU$27.0m in cash, leading to a AU$24.7m net cash position.
How Strong Is Murray Cod Australia's Balance Sheet?
According to the last reported balance sheet, Murray Cod Australia had liabilities of AU$2.61m due within 12 months, and liabilities of AU$13.0m due beyond 12 months. Offsetting these obligations, it had cash of AU$27.0m as well as receivables valued at AU$651.1k due within 12 months. So it actually has AU$12.0m more liquid assets than total liabilities.
This surplus suggests that Murray Cod Australia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Murray Cod Australia boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Murray Cod Australia'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.
In the last year Murray Cod Australia wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to AU$13m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Murray Cod Australia?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Murray Cod Australia had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$13m of cash and made a loss of AU$8.7m. While this does make the company a bit risky, it's important to remember it has net cash of AU$24.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Murray Cod Australia may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Murray Cod Australia has 2 warning signs we think you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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