Is Martello Technologies Group (CVE:MTLO) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Martello Technologies Group Inc. (CVE:MTLO) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that MTLO is potentially overvalued!

How Much Debt Does Martello Technologies Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Martello Technologies Group had CA$11.5m of debt, an increase on CA$9.88m, over one year. However, it does have CA$5.84m in cash offsetting this, leading to net debt of about CA$5.63m.

How Strong Is Martello Technologies Group's Balance Sheet?

The latest balance sheet data shows that Martello Technologies Group had liabilities of CA$19.9m due within a year, and liabilities of CA$4.31m falling due after that. On the other hand, it had cash of CA$5.84m and CA$5.83m worth of receivables due within a year. So its liabilities total CA$12.5m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CA$9.80m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Martello Technologies Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Martello Technologies Group made a loss at the EBIT level, and saw its revenue drop to CA$17m, which is a fall of 3.3%. We would much prefer see growth.

Caveat Emptor

Importantly, Martello Technologies Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$5.4m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$3.8m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Martello Technologies Group you should be aware of, and 2 of them can't be ignored.

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.