When MGC Pharmaceuticals Limited (ASX:MXC) reported its results to June 2021 its auditors, Ernst & Young LLP could not be sure that it would be able to continue as a going concern in the next year. This means that, based on the financial results to that date, the company arguably should raise capital, or otherwise strengthen the balance sheet, as soon as possible.
If the company does have to issue more shares, potential investors will be sure to consider how desperate it is for capital. So current risks on the balance sheet could have a big impact on how shareholders fare from here. Debt is always a risk factor in these cases, as creditors could be in a position to wind up the company, in the worst case scenario.
What Is MGC Pharmaceuticals's Debt?
As you can see below, at the end of June 2021, MGC Pharmaceuticals had AU$4.03m of debt, up from none a year ago. Click the image for more detail. But it also has AU$5.43m in cash to offset that, meaning it has AU$1.40m net cash.
A Look At MGC Pharmaceuticals' Liabilities
Zooming in on the latest balance sheet data, we can see that MGC Pharmaceuticals had liabilities of AU$6.13m due within 12 months and liabilities of AU$4.28m due beyond that. Offsetting these obligations, it had cash of AU$5.43m as well as receivables valued at AU$2.35m due within 12 months. So its liabilities total AU$2.63m more than the combination of its cash and short-term receivables.
Having regard to MGC Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$139.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, MGC Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MGC Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, MGC Pharmaceuticals reported revenue of AU$3.0m, which is a gain of 43%, 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.
So How Risky Is MGC Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months MGC Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$15m of cash and made a loss of AU$15m. With only AU$1.40m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, MGC Pharmaceuticals may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. We prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. That's because companies should always make sure the auditor has confidence that the company will continue as a going concern, in our view. 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. Be aware that MGC Pharmaceuticals is showing 6 warning signs in our investment analysis , and 2 of those are a bit unpleasant...
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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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.
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MGC Pharmaceuticals Limited, a bio-pharma company, develops and supplies phytomedicines in worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Adequate balance sheet and fair value.