We Think Mineral Commodities (ASX:MRC) Can Stay On Top Of Its Debt

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. As with many other companies Mineral Commodities Ltd (ASX:MRC) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mineral Commodities

What Is Mineral Commodities's Net Debt?

As you can see below, Mineral Commodities had US$3.30m of debt at December 2020, down from US$5.24m a year prior. However, it does have US$7.13m in cash offsetting this, leading to net cash of US$3.83m.

How Healthy Is Mineral Commodities' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mineral Commodities had liabilities of US$14.0m due within 12 months and liabilities of US$10.5m due beyond that. Offsetting this, it had US$7.13m in cash and US$13.4m in receivables that were due within 12 months. So its liabilities total US$3.95m more than the combination of its cash and short-term receivables.

Since publicly traded Mineral Commodities shares are worth a total of US$136.3m, 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. Despite its noteworthy liabilities, Mineral Commodities boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Mineral Commodities has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mineral Commodities's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Mineral Commodities may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Mineral Commodities recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Mineral Commodities has US$3.83m in net cash. And we liked the look of last year's 23% year-on-year EBIT growth. So we don't think Mineral Commodities's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Mineral Commodities you should be aware of, and 1 of them is potentially serious.

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. 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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