Is Mayne Pharma Group (ASX:MYX) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Mayne Pharma Group Limited (ASX:MYX) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that MYX is potentially undervalued!

What Is Mayne Pharma Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Mayne Pharma Group had AU$405.4m of debt, an increase on AU$338.0m, over one year. However, it does have AU$98.0m in cash offsetting this, leading to net debt of about AU$307.4m.

How Strong Is Mayne Pharma Group's Balance Sheet?

The latest balance sheet data shows that Mayne Pharma Group had liabilities of AU$610.4m due within a year, and liabilities of AU$120.4m falling due after that. Offsetting these obligations, it had cash of AU$98.0m as well as receivables valued at AU$283.0m due within 12 months. So it has liabilities totalling AU$349.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of AU$400.2m, so it does suggest shareholders should keep an eye on Mayne Pharma Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Mayne Pharma Group'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.

In the last year Mayne Pharma Group wasn't profitable at an EBIT level, but managed to grow its revenue by 6.0%, to AU$425m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Mayne Pharma Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable AU$72m at the EBIT level. 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. However, it doesn't help that it burned through AU$19m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like Mayne Pharma Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.