We Think Mission Ready Solutions (CVE:MRS) Has A Fair Chunk Of Debt

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. We note that Mission Ready Solutions Inc. (CVE:MRS) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Mission Ready Solutions

What Is Mission Ready Solutions's Debt?

As you can see below, at the end of June 2022, Mission Ready Solutions had CA$10.1m of debt, up from CA$3.11m a year ago. Click the image for more detail. However, it does have CA$2.22m in cash offsetting this, leading to net debt of about CA$7.85m.

How Strong Is Mission Ready Solutions' Balance Sheet?

According to the last reported balance sheet, Mission Ready Solutions had liabilities of CA$2.98m due within 12 months, and liabilities of CA$8.56m due beyond 12 months. Offsetting this, it had CA$2.22m in cash and CA$371.9k in receivables that were due within 12 months. So its liabilities total CA$8.95m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Mission Ready Solutions has a market capitalization of CA$26.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Mission Ready Solutions's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Mission Ready Solutions had a loss before interest and tax, and actually shrunk its revenue by 89%, to CA$16m. To be frank that doesn't bode well.

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). Indeed, it lost a very considerable CA$5.7m at the EBIT level. 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. Another cause for caution is that is bled CA$2.9m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Mission Ready Solutions (1 is concerning!) that you should be aware of before investing here.

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.