MGC Pharmaceuticals (ASX:MXC) Has Debt But No Earnings; Should You Worry?

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. As with many other companies MGC Pharmaceuticals Limited (ASX:MXC) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for MGC Pharmaceuticals

How Much Debt Does MGC Pharmaceuticals Carry?

The image below, which you can click on for greater detail, shows that at December 2021 MGC Pharmaceuticals had debt of AU$2.32m, up from AU$72.5k in one year. But it also has AU$8.06m in cash to offset that, meaning it has AU$5.75m net cash.

How Strong Is MGC Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that MGC Pharmaceuticals had liabilities of AU$6.69m falling due within a year, and liabilities of AU$4.98m due beyond that. On the other hand, it had cash of AU$8.06m and AU$1.94m worth of receivables due within a year. So its liabilities total AU$1.66m more than the combination of its cash and short-term receivables.

Since publicly traded MGC Pharmaceuticals shares are worth a total of AU$59.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, MGC Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year MGC Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 359%, to AU$4.8m. That's virtually the hole-in-one of revenue growth!

So How Risky Is MGC Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that MGC Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$16m and booked a AU$17m accounting loss. With only AU$5.75m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, MGC Pharmaceuticals's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that MGC Pharmaceuticals is showing 6 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.