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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Magellan Aerospace Corporation (TSE:MAL) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Our analysis indicates that MAL is potentially undervalued!
How Much Debt Does Magellan Aerospace Carry?
The image below, which you can click on for greater detail, shows that Magellan Aerospace had debt of CA$35.0m at the end of June 2022, a reduction from CA$37.6m over a year. On the flip side, it has CA$11.2m in cash leading to net debt of about CA$23.8m.
How Strong Is Magellan Aerospace's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Magellan Aerospace had liabilities of CA$153.8m due within 12 months and liabilities of CA$99.0m due beyond that. Offsetting these obligations, it had cash of CA$11.2m as well as receivables valued at CA$261.5m due within 12 months. So it can boast CA$19.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Magellan Aerospace could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 Magellan Aerospace 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.
Over 12 months, Magellan Aerospace reported revenue of CA$725m, which is a gain of 5.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Magellan Aerospace produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$11m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Magellan Aerospace's profit, revenue, and operating cashflow have changed over the last few years.
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.
About TSX:MAL
Magellan Aerospace
Through its subsidiaries, engineers and manufactures aeroengine and aerostructure components for aerospace markets in Canada, the United States, and Europe.
Flawless balance sheet and good value.