Here's Why Mineral Commodities (ASX:MRC) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mineral Commodities Ltd (ASX:MRC) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Mineral Commodities

How Much Debt Does Mineral Commodities Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Mineral Commodities had US$9.80m of debt, an increase on US$2.88m, over one year. However, it does have US$3.95m in cash offsetting this, leading to net debt of about US$5.84m.

How Strong Is Mineral Commodities' Balance Sheet?

We can see from the most recent balance sheet that Mineral Commodities had liabilities of US$23.2m falling due within a year, and liabilities of US$9.92m due beyond that. On the other hand, it had cash of US$3.95m and US$12.5m worth of receivables due within a year. So it has liabilities totalling US$16.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Mineral Commodities has a market capitalization of US$29.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Mineral Commodities's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Mineral Commodities had a loss before interest and tax, and actually shrunk its revenue by 33%, to US$47m. That makes us nervous, to say the least.

Caveat Emptor

While Mineral Commodities's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$11m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$11m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Mineral Commodities (of which 1 shouldn't be ignored!) you should know about.

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.

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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.