Is MCH Group (VTX:MCHN) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that MCH Group AG (VTX:MCHN) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 MCH Group

How Much Debt Does MCH Group Carry?

The chart below, which you can click on for greater detail, shows that MCH Group had CHF292.0m in debt in June 2020; about the same as the year before. However, because it has a cash reserve of CHF97.9m, its net debt is less, at about CHF194.1m.

A Look At MCH Group's Liabilities

The latest balance sheet data shows that MCH Group had liabilities of CHF100.2m due within a year, and liabilities of CHF292.0m falling due after that. Offsetting this, it had CHF97.9m in cash and CHF74.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF220.2m.

This deficit casts a shadow over the CHF87.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, MCH Group would likely require a major re-capitalisation if it had to pay its creditors today. 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 MCH 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, MCH Group made a loss at the EBIT level, and saw its revenue drop to CHF287m, which is a fall of 34%. That makes us nervous, to say the least.

Caveat Emptor

Not only did MCH Group'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 CHF30m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CHF28m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for MCH Group that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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