Is Megaport (ASX:MP1) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Megaport Limited (ASX:MP1) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Megaport's Debt?

You can click the graphic below for the historical numbers, but it shows that Megaport had AU$14.1m of debt in December 2024, down from AU$17.4m, one year before. However, its balance sheet shows it holds AU$89.8m in cash, so it actually has AU$75.7m net cash.

How Strong Is Megaport's Balance Sheet?

According to the last reported balance sheet, Megaport had liabilities of AU$51.3m due within 12 months, and liabilities of AU$16.0m due beyond 12 months. Offsetting these obligations, it had cash of AU$89.8m as well as receivables valued at AU$27.4m due within 12 months. So it can boast AU$49.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Megaport could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Megaport 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 ultimately the future profitability of the business will decide if Megaport 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.

View our latest analysis for Megaport

Over 12 months, Megaport reported revenue of AU$207m, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Megaport?

Although Megaport had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of AU$6.0m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 1 warning sign for Megaport 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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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.