Is McCoy Global (TSE:MCB) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies McCoy Global Inc. (TSE:MCB) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for McCoy Global

What Is McCoy Global's Debt?

The image below, which you can click on for greater detail, shows that McCoy Global had debt of CA$7.74m at the end of June 2021, a reduction from CA$9.94m over a year. However, it does have CA$10.9m in cash offsetting this, leading to net cash of CA$3.17m.

How Healthy Is McCoy Global's Balance Sheet?

We can see from the most recent balance sheet that McCoy Global had liabilities of CA$7.93m falling due within a year, and liabilities of CA$9.87m due beyond that. Offsetting this, it had CA$10.9m in cash and CA$3.88m in receivables that were due within 12 months. So its liabilities total CA$3.01m more than the combination of its cash and short-term receivables.

Given McCoy Global has a market capitalization of CA$19.7m, it's hard to believe these liabilities pose much threat. 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, McCoy Global boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since McCoy Global will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year McCoy Global had a loss before interest and tax, and actually shrunk its revenue by 38%, to CA$30m. To be frank that doesn't bode well.

So How Risky Is McCoy Global?

While McCoy Global lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CA$1.7m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 2 warning signs for McCoy Global you should be aware of.

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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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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