Would Mayne Pharma Group (ASX:MYX) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Mayne Pharma Group Limited (ASX:MYX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mayne Pharma Group

What Is Mayne Pharma Group's Net Debt?

As you can see below, at the end of June 2020, Mayne Pharma Group had AU$389.1m of debt, up from AU$369.8m a year ago. Click the image for more detail. However, because it has a cash reserve of AU$137.8m, its net debt is less, at about AU$251.3m.

How Healthy Is Mayne Pharma Group's Balance Sheet?

According to the last reported balance sheet, Mayne Pharma Group had liabilities of AU$219.3m due within 12 months, and liabilities of AU$563.6m due beyond 12 months. Offsetting this, it had AU$137.8m in cash and AU$233.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$411.8m.

This deficit is considerable relative to its market capitalization of AU$621.3m, so it does suggest shareholders should keep an eye on Mayne Pharma Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mayne Pharma Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Mayne Pharma Group made a loss at the EBIT level, and saw its revenue drop to AU$457m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While Mayne Pharma Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost AU$13m 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. For example, we would not want to see a repeat of last year's loss of AU$93m. In the meantime, we consider the stock very risky. For riskier companies like Mayne Pharma Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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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