Stock Analysis

Is MBB (ETR:MBB) Using Too Much Debt?

XTRA:MBB
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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.' 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. Importantly, MBB SE (ETR:MBB) does carry debt. But is this debt a concern to shareholders?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MBB

What Is MBB's Net Debt?

As you can see below, MBB had €64.1m of debt at September 2020, down from €75.4m a year prior. But on the other hand it also has €199.5m in cash, leading to a €135.4m net cash position.

debt-equity-history-analysis
XTRA:MBB Debt to Equity History January 4th 2021

A Look At MBB's Liabilities

According to the last reported balance sheet, MBB had liabilities of €200.8m due within 12 months, and liabilities of €151.4m due beyond 12 months. On the other hand, it had cash of €199.5m and €205.5m worth of receivables due within a year. So it can boast €52.8m more liquid assets than total liabilities.

This short term liquidity is a sign that MBB could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that MBB has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that MBB has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. 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 MBB's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. MBB may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, MBB recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that MBB has net cash of €135.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 55% over the last year. So we don't think MBB's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - MBB has 3 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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