Is Multiexport Foods (SNSE:MULTIFOODS) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Multiexport Foods S.A. (SNSE:MULTIFOODS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Multiexport Foods

What Is Multiexport Foods's Debt?

As you can see below, at the end of September 2020, Multiexport Foods had US$200.8m of debt, up from US$76.2m a year ago. Click the image for more detail. On the flip side, it has US$11.9m in cash leading to net debt of about US$189.0m.

How Strong Is Multiexport Foods' Balance Sheet?

The latest balance sheet data shows that Multiexport Foods had liabilities of US$144.1m due within a year, and liabilities of US$185.5m falling due after that. Offsetting these obligations, it had cash of US$11.9m as well as receivables valued at US$60.4m due within 12 months. So it has liabilities totalling US$257.3m more than its cash and near-term receivables, combined.

Multiexport Foods has a market capitalization of US$515.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Multiexport Foods 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.

Over 12 months, Multiexport Foods made a loss at the EBIT level, and saw its revenue drop to US$494m, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

Not only did Multiexport Foods'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 US$123m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$98m of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 1 warning sign with Multiexport Foods , and understanding them should be part of your investment process.

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. 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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