Is Mitchell Services (ASX:MSV) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Mitchell Services Limited (ASX:MSV) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mitchell Services

How Much Debt Does Mitchell Services Carry?

You can click the graphic below for the historical numbers, but it shows that Mitchell Services had AU$8.17m of debt in June 2022, down from AU$11.7m, one year before. However, it also had AU$3.78m in cash, and so its net debt is AU$4.39m.

How Strong Is Mitchell Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mitchell Services had liabilities of AU$51.0m due within 12 months and liabilities of AU$30.5m due beyond that. Offsetting these obligations, it had cash of AU$3.78m as well as receivables valued at AU$36.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$41.8m.

Mitchell Services has a market capitalization of AU$82.7m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mitchell Services can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Mitchell Services wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to AU$213m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Mitchell Services had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$2.3m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of AU$2.5m and a profit of AU$16k. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Mitchell Services that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.