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 MSM Corporation International Limited (ASX:MSM) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is MSM Corporation International’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 MSM Corporation International had AU$1.43m of debt, an increase on AU$506.6k, over one year. However, it does have AU$357.8k in cash offsetting this, leading to net debt of about AU$1.07m.
How Strong Is MSM Corporation International’s Balance Sheet?
According to the balance sheet data, MSM Corporation International had liabilities of AU$1.90m due within 12 months, but no longer term liabilities. On the other hand, it had cash of AU$357.8k and AU$2.01m worth of receivables due within a year. So it can boast AU$468.8k more liquid assets than total liabilities.
This surplus suggests that MSM Corporation International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. There’s no doubt that we learn most about debt from the balance sheet. But it is MSM Corporation International’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.
It seems likely shareholders hope that MSM Corporation International can significantly advance the business plan before too long, because it doesn’t have any significant revenue at the moment.
While MSM Corporation International’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost AU$1.0m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we’d want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how MSM Corporation International’s profit, revenue, and operating cashflow have changed over the last few years.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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