M+S Hydraulic AD (BUL:MSH) Has A Rock Solid Balance Sheet

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.' 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. As with many other companies M+S Hydraulic AD (BUL:MSH) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 M+S Hydraulic AD

What Is M+S Hydraulic AD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 M+S Hydraulic AD had лв5.85m of debt, an increase on none, over one year. However, it does have лв30.3m in cash offsetting this, leading to net cash of лв24.4m.

How Strong Is M+S Hydraulic AD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that M+S Hydraulic AD had liabilities of лв59.8m due within 12 months and liabilities of лв10.4m due beyond that. Offsetting these obligations, it had cash of лв30.3m as well as receivables valued at лв47.0m due within 12 months. So it actually has лв7.14m more liquid assets than total liabilities.

Having regard to M+S Hydraulic AD's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the лв414.0m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, M+S Hydraulic AD boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that M+S Hydraulic AD has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is M+S Hydraulic AD'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While M+S Hydraulic AD 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. During the last three years, M+S Hydraulic AD produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that M+S Hydraulic AD has net cash of лв24.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 59% year-on-year EBIT growth. So is M+S Hydraulic AD's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for M+S Hydraulic AD that you should be aware of.

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.