Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Magnis Energy Technologies Limited (ASX:MNS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Magnis Energy Technologies's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Magnis Energy Technologies had AU$65.2m of debt, an increase on none, over one year. But on the other hand it also has AU$72.9m in cash, leading to a AU$7.72m net cash position.
A Look At Magnis Energy Technologies' Liabilities
Zooming in on the latest balance sheet data, we can see that Magnis Energy Technologies had liabilities of AU$3.94m due within 12 months and liabilities of AU$65.2m due beyond that. Offsetting these obligations, it had cash of AU$72.9m as well as receivables valued at AU$20.1m due within 12 months. So it actually has AU$23.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Magnis Energy Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Magnis Energy Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Magnis Energy Technologies will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Since Magnis Energy Technologies has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Magnis Energy Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Magnis Energy Technologies had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$27m and booked a AU$11m accounting loss. Given it only has net cash of AU$7.72m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Magnis Energy Technologies has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Magnis Energy Technologies (1 is significant) you should be aware of.
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.
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.
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