Mayne Pharma Group (ASX:MYX) Is Carrying A Fair Bit Of 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.' 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. Importantly, Mayne Pharma Group Limited (ASX:MYX) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Mayne Pharma Group

How Much Debt Does Mayne Pharma Group Carry?

The image below, which you can click on for greater detail, shows that Mayne Pharma Group had debt of AU$344.2m at the end of December 2020, a reduction from AU$376.2m over a year. On the flip side, it has AU$134.3m in cash leading to net debt of about AU$209.9m.

How Healthy Is Mayne Pharma Group's Balance Sheet?

We can see from the most recent balance sheet that Mayne Pharma Group had liabilities of AU$249.7m falling due within a year, and liabilities of AU$462.8m due beyond that. Offsetting these obligations, it had cash of AU$134.3m as well as receivables valued at AU$208.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$369.5m.

This deficit isn't so bad because Mayne Pharma Group is worth AU$670.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 8.2%, to AU$439m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Mayne Pharma Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$11m 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. We would feel better if it turned its trailing twelve month loss of AU$256m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Mayne Pharma Group that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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