Mitchell Services (ASX:MSV) Is Making Moderate Use Of 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 Mitchell Services Limited (ASX:MSV) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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$13.4m of debt in December 2020, down from AU$16.1m, one year before. However, it does have AU$9.65m in cash offsetting this, leading to net debt of about AU$3.78m.

A Look At Mitchell Services' Liabilities

We can see from the most recent balance sheet that Mitchell Services had liabilities of AU$40.8m falling due within a year, and liabilities of AU$28.7m due beyond that. Offsetting these obligations, it had cash of AU$9.65m as well as receivables valued at AU$22.0m due within 12 months. So it has liabilities totalling AU$37.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Mitchell Services has a market capitalization of AU$81.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mitchell Services'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.

Over 12 months, Mitchell Services reported revenue of AU$203m, which is a gain of 56%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Mitchell Services still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$1.5m. 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. We would feel better if it turned its trailing twelve month loss of AU$217k into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Mitchell Services .

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. 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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