We Think Mission Ready Solutions (CVE:MRS) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Mission Ready Solutions Inc. (CVE:MRS) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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

How Much Debt Does Mission Ready Solutions Carry?

The image below, which you can click on for greater detail, shows that Mission Ready Solutions had debt of CA$2.89m at the end of September 2021, a reduction from CA$9.14m over a year. However, it does have CA$4.35m in cash offsetting this, leading to net cash of CA$1.46m.

How Strong Is Mission Ready Solutions' Balance Sheet?

The latest balance sheet data shows that Mission Ready Solutions had liabilities of CA$14.3m due within a year, and liabilities of CA$2.10m falling due after that. Offsetting these obligations, it had cash of CA$4.35m as well as receivables valued at CA$1.65m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$10.4m.

Of course, Mission Ready Solutions has a market capitalization of CA$54.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Mission Ready Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Mission Ready Solutions improved its EBIT from a last year's loss to a positive CA$1.4m. The balance sheet is clearly the area to focus on when you are analysing debt. 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$1.46m. And it impressed us with free cash flow of CA$1.6m, being 117% of its EBIT. So we are not troubled with Mission Ready Solutions's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Mission Ready Solutions , and understanding them should be part of your investment process.

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.