We Think Monadelphous Group (ASX:MND) Can Stay On Top Of Its Debt

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.' 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. Importantly, Monadelphous Group Limited (ASX:MND) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Monadelphous Group

How Much Debt Does Monadelphous Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Monadelphous Group had AU$3.52m of debt, an increase on AU$3.30m, over one year. However, its balance sheet shows it holds AU$208.3m in cash, so it actually has AU$204.8m net cash.

A Look At Monadelphous Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Monadelphous Group had liabilities of AU$249.2m due within 12 months and liabilities of AU$80.5m due beyond that. Offsetting this, it had AU$208.3m in cash and AU$289.8m in receivables that were due within 12 months. So it can boast AU$168.4m more liquid assets than total liabilities.

This surplus suggests that Monadelphous Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Monadelphous Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Monadelphous Group's load is not too heavy, because its EBIT was down 31% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Monadelphous Group'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Monadelphous Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Monadelphous Group recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Monadelphous Group has net cash of AU$204.8m, as well as more liquid assets than liabilities. So we don't have any problem with Monadelphous Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Monadelphous Group .

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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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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