Does Mustera Property Group (ASX:MPX) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Mustera Property Group Limited (ASX:MPX) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mustera Property Group

What Is Mustera Property Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Mustera Property Group had AU$24.0m of debt in December 2020, down from AU$25.3m, one year before. And it doesn't have much cash, so its net debt is about the same.

A Look At Mustera Property Group's Liabilities

According to the last reported balance sheet, Mustera Property Group had liabilities of AU$24.0m due within 12 months, and liabilities of AU$5.85m due beyond 12 months. On the other hand, it had cash of AU$232.6k and AU$276.6k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$29.3m.

This is a mountain of leverage relative to its market capitalization of AU$32.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mustera Property Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Mustera Property Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Mustera Property Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$167k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$1.3m. So we do think this stock is quite risky. 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 Mustera Property Group has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

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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