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. Importantly, Mohawk Group Holdings, Inc. (NASDAQ:MWK) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View 3 warning signs we detected for Mohawk Group Holdings
What Is Mohawk Group Holdings's Net Debt?
As you can see below, at the end of September 2019, Mohawk Group Holdings had US$27.2m of debt, up from US$27.5 a year ago. Click the image for more detail. But it also has US$35.7m in cash to offset that, meaning it has US$8.51m net cash.
How Healthy Is Mohawk Group Holdings's Balance Sheet?
We can see from the most recent balance sheet that Mohawk Group Holdings had liabilities of US$40.0m falling due within a year, and liabilities of US$13.3m due beyond that. Offsetting these obligations, it had cash of US$35.7m as well as receivables valued at US$3.15m due within 12 months. So it has liabilities totalling US$14.5m more than its cash and near-term receivables, combined.
Since publicly traded Mohawk Group Holdings shares are worth a total of US$84.1m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mohawk Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Mohawk Group Holdings which any shareholder or potential investor should be aware of.
Over 12 months, Mohawk Group Holdings reported revenue of US$109m, which is a gain of 70%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Mohawk Group Holdings?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Mohawk Group Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$24m and booked a US$36m accounting loss. But at least it has US$8.51m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Mohawk Group Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Mohawk Group Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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