Is MSL Solutions (ASX:MSL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, MSL Solutions Limited (ASX:MSL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MSL Solutions

What Is MSL Solutions's Debt?

As you can see below, at the end of December 2021, MSL Solutions had AU$3.79m of debt, up from AU$2.45m a year ago. Click the image for more detail. But on the other hand it also has AU$7.80m in cash, leading to a AU$4.01m net cash position.

How Strong Is MSL Solutions' Balance Sheet?

The latest balance sheet data shows that MSL Solutions had liabilities of AU$12.3m due within a year, and liabilities of AU$11.4m falling due after that. On the other hand, it had cash of AU$7.80m and AU$4.73m worth of receivables due within a year. So its liabilities total AU$11.2m more than the combination of its cash and short-term receivables.

Since publicly traded MSL Solutions shares are worth a total of AU$63.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, MSL Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, MSL Solutions made a loss at the EBIT level, last year, but improved that to positive EBIT of AU$1.4m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MSL Solutions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MSL Solutions 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 year, MSL Solutions actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although MSL Solutions's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$4.01m. And it impressed us with free cash flow of AU$3.8m, being 267% of its EBIT. So we don't have any problem with MSL Solutions's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that MSL Solutions is showing 4 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.