Megaport (ASX:MP1) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Megaport Limited (ASX:MP1) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Megaport

What Is Megaport's Debt?

As you can see below, at the end of June 2022, Megaport had AU$13.7m of debt, up from AU$7.68m a year ago. Click the image for more detail. But on the other hand it also has AU$83.0m in cash, leading to a AU$69.3m net cash position.

A Look At Megaport's Liabilities

The latest balance sheet data shows that Megaport had liabilities of AU$53.1m due within a year, and liabilities of AU$25.0m falling due after that. Offsetting this, it had AU$83.0m in cash and AU$15.8m in receivables that were due within 12 months. So it can boast AU$20.6m more liquid assets than total liabilities.

Having regard to Megaport's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$1.27b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Megaport boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Megaport can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Megaport wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to AU$110m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Megaport?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Megaport lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$50m of cash and made a loss of AU$48m. However, it has net cash of AU$69.3m, so it has a bit of time before it will need more capital. Megaport's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Megaport , and understanding them should be part of your investment process.

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.