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 the more important question is: how much risk is that debt creating?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MGC Pharmaceuticals

How Much Debt Does MGC Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 MGC Pharmaceuticals had AU$2.32m of debt, an increase on AU$72.5k, over one year. However, its balance sheet shows it holds AU$8.06m in cash, so it actually has AU$5.75m net cash.

How Strong Is MGC Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, MGC Pharmaceuticals had liabilities of AU$6.69m due within 12 months, and liabilities of AU$4.98m due beyond 12 months. On the other hand, it had cash of AU$8.06m and AU$1.94m worth of receivables due within a year. So it has liabilities totalling AU$1.66m more than its cash and near-term receivables, combined.

Of course, MGC Pharmaceuticals has a market capitalization of AU$46.4m, so these liabilities are probably manageable. 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! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, MGC Pharmaceuticals reported revenue of AU$4.8m, which is a gain of 359%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is MGC Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year MGC Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. 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. Case in point: We've spotted 6 warning signs for MGC Pharmaceuticals you should be aware of, and 1 of them makes us a bit uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.