Is McCoy Global (TSE:MCB) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, McCoy Global Inc. (TSE:MCB) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for McCoy Global

What Is McCoy Global's Debt?

You can click the graphic below for the historical numbers, but it shows that McCoy Global had CA$4.28m of debt in June 2022, down from CA$7.74m, one year before. However, its balance sheet shows it holds CA$7.65m in cash, so it actually has CA$3.37m net cash.

How Healthy Is McCoy Global's Balance Sheet?

The latest balance sheet data shows that McCoy Global had liabilities of CA$12.0m due within a year, and liabilities of CA$5.41m falling due after that. Offsetting this, it had CA$7.65m in cash and CA$11.5m in receivables that were due within 12 months. So it can boast CA$1.79m more liquid assets than total liabilities.

This short term liquidity is a sign that McCoy Global could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, McCoy Global boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, McCoy Global made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$2.4m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since McCoy Global 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While McCoy Global has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, McCoy Global saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that McCoy Global has net cash of CA$3.37m, as well as more liquid assets than liabilities. So we don't have any problem with McCoy Global'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. Be aware that McCoy Global is showing 2 warning signs in our investment analysis , and 1 of those is significant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.