Health Check: How Prudently Does MIRC Electronics (NSE:MIRCELECTR) Use Debt?

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 MIRC Electronics Limited (NSE:MIRCELECTR) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

Check out our latest analysis for MIRC Electronics

What Is MIRC Electronics's Net Debt?

As you can see below, at the end of March 2020, MIRC Electronics had ₹745.3m of debt, up from ₹696.0m a year ago. Click the image for more detail. However, it does have ₹93.7m in cash offsetting this, leading to net debt of about ₹651.6m.

A Look At MIRC Electronics's Liabilities

We can see from the most recent balance sheet that MIRC Electronics had liabilities of ₹3.37b falling due within a year, and liabilities of ₹187.3m due beyond that. On the other hand, it had cash of ₹93.7m and ₹787.2m worth of receivables due within a year. So it has liabilities totalling ₹2.7b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₹2.47b, we think shareholders really should watch MIRC Electronics's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is MIRC Electronics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, MIRC Electronics made a loss at the EBIT level, and saw its revenue drop to ₹6.0b, which is a fall of 6.2%. We would much prefer see growth.

Caveat Emptor

Importantly, MIRC Electronics had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹20.3m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₹54.4m over the last twelve months. That means it's on the risky side of things. 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. To that end, you should learn about the 3 warning signs we've spotted with MIRC Electronics (including 1 which is makes us a bit uncomfortable) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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