We Think McCoy Global (TSE:MCB) Is Taking Some Risk With Its 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.' 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. As with many other companies McCoy Global Inc. (TSE:MCB) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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$4.14m at the end of March 2022, a reduction from CA$10.6m over a year. However, its balance sheet shows it holds CA$10.2m in cash, so it actually has CA$6.04m net cash.

How Healthy Is McCoy Global's Balance Sheet?

We can see from the most recent balance sheet that McCoy Global had liabilities of CA$9.94m falling due within a year, and liabilities of CA$5.95m due beyond that. Offsetting these obligations, it had cash of CA$10.2m as well as receivables valued at CA$7.12m due within 12 months. So it can boast CA$1.41m more liquid assets than total liabilities.

This surplus suggests that McCoy Global has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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$394k in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is McCoy Global's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 it is always sensible to investigate a company's debt, in this case McCoy Global has CA$6.04m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about McCoy Global's balance sheet. 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. Case in point: We've spotted 3 warning signs for McCoy Global you should be aware of, and 1 of them doesn't sit too well with us.

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.