Here's Why Mission Ready Solutions (CVE:MRS) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Mission Ready Solutions Inc. (CVE:MRS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mission Ready Solutions

What Is Mission Ready Solutions's Debt?

As you can see below, Mission Ready Solutions had CA$3.11m of debt at June 2021, down from CA$9.74m a year prior. However, it does have CA$4.44m in cash offsetting this, leading to net cash of CA$1.33m.

How Healthy Is Mission Ready Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mission Ready Solutions had liabilities of CA$14.5m due within 12 months and liabilities of CA$2.04m due beyond that. Offsetting these obligations, it had cash of CA$4.44m as well as receivables valued at CA$1.09m due within 12 months. So it has liabilities totalling CA$11.0m more than its cash and near-term receivables, combined.

Of course, Mission Ready Solutions has a market capitalization of CA$60.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Mission Ready Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Mission Ready Solutions made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$2.7m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Mission Ready 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Mission Ready Solutions 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. Happily for any shareholders, Mission Ready Solutions actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Mission Ready 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 CA$1.33m. And it impressed us with free cash flow of CA$6.7m, being 250% of its EBIT. So we don't have any problem with Mission Ready Solutions's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Mission Ready Solutions that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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