Yahoo Finance Magellan Aerospace (TSE:MAL) Has A Pretty Healthy Balance Sheet
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Magellan Aerospace Corporation (TSE:MAL) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Magellan Aerospace
What Is Magellan Aerospace's Debt?
The image below, which you can click on for greater detail, shows that Magellan Aerospace had debt of CA$62.7m at the end of March 2021, a reduction from CA$77.4m over a year. However, it does have CA$71.3m in cash offsetting this, leading to net cash of CA$8.63m.
How Strong Is Magellan Aerospace's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Magellan Aerospace had liabilities of CA$159.1m due within 12 months and liabilities of CA$107.6m due beyond that. Offsetting these obligations, it had cash of CA$71.3m as well as receivables valued at CA$218.9m due within 12 months. So it can boast CA$23.6m more liquid assets than total liabilities.
This surplus suggests that Magellan Aerospace has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Magellan Aerospace has more cash than debt is arguably a good indication that it can manage its debt safely.
Shareholders should be aware that Magellan Aerospace's EBIT was down 90% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Magellan Aerospace can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Magellan Aerospace has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Magellan Aerospace recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Magellan Aerospace has net cash of CA$8.63m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CA$80m, being 82% of its EBIT. So we don't have any problem with Magellan Aerospace's use of debt. 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. For example, we've discovered 1 warning sign for Magellan Aerospace that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
This article by Simply Wall St is general in nature. 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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