Health Check: How Prudently Does Merino (ASX:MNC) Use Debt?

Warren Buffett famously said, '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. As with many other companies Merino & Co. Limited (ASX:MNC) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Merino's Debt?

The image below, which you can click on for greater detail, shows that Merino had debt of AU$2.84m at the end of June 2025, a reduction from AU$3.84m over a year. But it also has AU$3.08m in cash to offset that, meaning it has AU$244.2k net cash.

How Healthy Is Merino's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Merino had liabilities of AU$1.36m due within 12 months and liabilities of AU$3.35m due beyond that. On the other hand, it had cash of AU$3.08m and AU$374.7k worth of receivables due within a year. So its liabilities total AU$1.25m more than the combination of its cash and short-term receivables.

Since publicly traded Merino shares are worth a total of AU$11.8m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Merino also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Merino'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.

Check out our latest analysis for Merino

Over 12 months, Merino made a loss at the EBIT level, and saw its revenue drop to AU$3.6m, which is a fall of 37%. To be frank that doesn't bode well.

So How Risky Is Merino?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Merino had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$2.4m and booked a AU$2.8m accounting loss. With only AU$244.2k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Merino (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.