Here's Why Macmahon Holdings (ASX:MAH) Can Manage Its Debt Responsibly

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.' 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 Macmahon Holdings Limited (ASX:MAH) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Macmahon Holdings

What Is Macmahon Holdings's Net Debt?

As you can see below, Macmahon Holdings had AU$192.9m of debt at June 2024, down from AU$222.0m a year prior. But it also has AU$194.6m in cash to offset that, meaning it has AU$1.67m net cash.

A Look At Macmahon Holdings' Liabilities

The latest balance sheet data shows that Macmahon Holdings had liabilities of AU$558.2m due within a year, and liabilities of AU$259.7m falling due after that. Offsetting this, it had AU$194.6m in cash and AU$392.3m in receivables that were due within 12 months. So it has liabilities totalling AU$231.0m more than its cash and near-term receivables, combined.

Macmahon Holdings has a market capitalization of AU$707.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Macmahon Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Sadly, Macmahon Holdings's EBIT actually dropped 6.2% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Macmahon Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Macmahon Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Macmahon Holdings generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Macmahon Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$1.67m. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in AU$121m. So we are not troubled with Macmahon Holdings's debt use. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Macmahon Holdings's dividend history, without delay!

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.