Is Mighty Craft (ASX:MCL) A Risky Investment?

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. Importantly, Mighty Craft Limited (ASX:MCL) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Mighty Craft

What Is Mighty Craft's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Mighty Craft had AU$14.4m of debt, an increase on AU$6.81m, over one year. However, it also had AU$3.74m in cash, and so its net debt is AU$10.7m.

A Look At Mighty Craft's Liabilities

The latest balance sheet data shows that Mighty Craft had liabilities of AU$24.4m due within a year, and liabilities of AU$28.8m falling due after that. Offsetting these obligations, it had cash of AU$3.74m as well as receivables valued at AU$4.49m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$45.0m.

This is a mountain of leverage relative to its market capitalization of AU$47.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mighty Craft can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Mighty Craft reported revenue of AU$64m, which is a gain of 117%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Mighty Craft still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$13m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$15m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 3 warning signs for Mighty Craft that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.