Is Mission Ready Solutions (CVE:MRS) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Mission Ready Solutions Inc. (CVE:MRS) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Mission Ready Solutions

What Is Mission Ready Solutions's Debt?

As you can see below, at the end of December 2021, Mission Ready Solutions had CA$18.2m of debt, up from CA$4.87m a year ago. Click the image for more detail. On the flip side, it has CA$7.90m in cash leading to net debt of about CA$10.3m.

A Look At Mission Ready Solutions' Liabilities

The latest balance sheet data shows that Mission Ready Solutions had liabilities of CA$4.80m due within a year, and liabilities of CA$15.1m falling due after that. Offsetting these obligations, it had cash of CA$7.90m as well as receivables valued at CA$2.72m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$9.32m.

Mission Ready Solutions has a market capitalization of CA$44.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mission Ready Solutions will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Mission Ready Solutions had a loss before interest and tax, and actually shrunk its revenue by 12%, to CA$92m. That's not what we would hope to see.

Caveat Emptor

Not only did Mission Ready Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CA$1.0m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$1.2m of cash over the last year. So to be blunt we think it is risky. 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. Be aware that Mission Ready Solutions is showing 3 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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