Does MSL Solutions (ASX:MSL) 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.' 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, MSL Solutions Limited (ASX:MSL) does carry debt. But should shareholders be worried about its use of debt?

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. 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.

View our latest analysis for MSL Solutions

What Is MSL Solutions's Debt?

As you can see below, at the end of December 2020, MSL Solutions had AU$2.45m of debt, up from AU$1.34m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$2.81m in cash, so it actually has AU$368.0k net cash.

How Strong Is MSL Solutions' Balance Sheet?

According to the last reported balance sheet, MSL Solutions had liabilities of AU$11.3m due within 12 months, and liabilities of AU$9.76m due beyond 12 months. Offsetting this, it had AU$2.81m in cash and AU$4.80m in receivables that were due within 12 months. So its liabilities total AU$13.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because MSL Solutions is worth AU$41.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, MSL Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since MSL Solutions will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year MSL Solutions had a loss before interest and tax, and actually shrunk its revenue by 11%, to AU$24m. That's not what we would hope to see.

So How Risky Is MSL Solutions?

Although MSL Solutions had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$1.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for MSL Solutions (of which 1 makes us a bit uncomfortable!) you should know about.

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. 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.
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