Is Macquarie Technology Group (ASX:MAQ) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Macquarie Technology Group Limited (ASX:MAQ) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Macquarie Technology Group

What Is Macquarie Technology Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Macquarie Technology Group had AU$92.2m of debt, an increase on none, over one year. But it also has AU$115.0m in cash to offset that, meaning it has AU$22.8m net cash.

How Strong Is Macquarie Technology Group's Balance Sheet?

The latest balance sheet data shows that Macquarie Technology Group had liabilities of AU$85.1m due within a year, and liabilities of AU$149.6m falling due after that. Offsetting these obligations, it had cash of AU$115.0m as well as receivables valued at AU$33.2m due within 12 months. So its liabilities total AU$86.4m more than the combination of its cash and short-term receivables.

Since publicly traded Macquarie Technology Group shares are worth a total of AU$2.20b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Macquarie Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Macquarie Technology Group grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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 Macquarie Technology Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Macquarie Technology Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Macquarie Technology Group reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about Macquarie Technology Group's liabilities, but we can be reassured by the fact it has has net cash of AU$22.8m. And we liked the look of last year's 34% year-on-year EBIT growth. So we don't think Macquarie Technology Group's use of debt is 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. Be aware that Macquarie Technology Group is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.