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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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, Mr Hamburger S.A. (WSE:MRH) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Mr Hamburger
How Much Debt Does Mr Hamburger Carry?
You can click the graphic below for the historical numbers, but it shows that Mr Hamburger had zł274.3k of debt in March 2019, down from zł391.2k, one year before However, because it has a cash reserve of zł110.4k, its net debt is less, at about zł164.0k.
How Healthy Is Mr Hamburger’s Balance Sheet?
We can see from the most recent balance sheet that Mr Hamburger had liabilities of zł2.63m falling due within a year, and liabilities of zł456.8k due beyond that. Offsetting this, it had zł110.4k in cash and zł530.4k in receivables that were due within 12 months. So its liabilities total zł2.45m more than the combination of its cash and short-term receivables.
Mr Hamburger has a market capitalization of zł12.1m, so it could very likely ameliorate its balance sheet if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. But either way, Mr Hamburger has virtually no net debt, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is Mr Hamburger’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, Mr Hamburger saw its revenue drop to zł12m, which is a fall of 2.5%. That’s not what we would hope to see.
Caveat Emptor
Importantly, Mr Hamburger had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost zł207k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled zł214k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Mr Hamburger I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.