Does Magellan Aerospace (TSE:MAL) Have A Healthy 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.' 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. As with many other companies Magellan Aerospace Corporation (TSE:MAL) makes use of debt. But the more important question is: how much risk is that debt creating?

We check all companies for important risks. See what we found for Magellan Aerospace in our free report.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Magellan Aerospace's Debt?

You can click the graphic below for the historical numbers, but it shows that Magellan Aerospace had CA$48.3m of debt in December 2024, down from CA$51.5m, one year before. But on the other hand it also has CA$56.4m in cash, leading to a CA$8.11m net cash position.

How Healthy Is Magellan Aerospace's Balance Sheet?

According to the last reported balance sheet, Magellan Aerospace had liabilities of CA$237.7m due within 12 months, and liabilities of CA$105.7m due beyond 12 months. Offsetting this, it had CA$56.4m in cash and CA$290.8m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Magellan Aerospace's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$788.5m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Magellan Aerospace boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Magellan Aerospace

In addition to that, we're happy to report that Magellan Aerospace has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Magellan Aerospace's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Magellan Aerospace may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last two years, Magellan Aerospace's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Magellan Aerospace has CA$8.11m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 55% over the last year. So is Magellan Aerospace's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Magellan Aerospace, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.