David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Marley Spoon AG (ASX:MMM) does carry debt. But should shareholders be worried about its use of debt?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Marley Spoon's Net Debt?
The image below, which you can click on for greater detail, shows that Marley Spoon had debt of €21.2m at the end of December 2020, a reduction from €37.1m over a year. However, it does have €34.4m in cash offsetting this, leading to net cash of €13.3m.
How Strong Is Marley Spoon's Balance Sheet?
According to the last reported balance sheet, Marley Spoon had liabilities of €37.0m due within 12 months, and liabilities of €27.9m due beyond 12 months. Offsetting these obligations, it had cash of €34.4m as well as receivables valued at €697.0k due within 12 months. So its liabilities total €29.8m more than the combination of its cash and short-term receivables.
Since publicly traded Marley Spoon shares are worth a total of €514.2m, it seems unlikely that this level of liabilities would be a major threat. 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, Marley Spoon boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Marley Spoon'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.
Over 12 months, Marley Spoon reported revenue of €254m, which is a gain of 96%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Marley Spoon?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Marley Spoon had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €4.2m of cash and made a loss of €86m. Given it only has net cash of €13.3m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Marley Spoon may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Marley Spoon (1 makes us a bit uncomfortable) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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