Warren Buffett famously said, '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. We can see that MS Industrie AG (ETR:MSAG) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for MS Industrie
What Is MS Industrie's Debt?
As you can see below, MS Industrie had €4.58m of debt at December 2020, down from €58.1m a year prior. But on the other hand it also has €13.2m in cash, leading to a €8.57m net cash position.
How Strong Is MS Industrie's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that MS Industrie had liabilities of €59.9m due within 12 months and liabilities of €43.1m due beyond that. Offsetting this, it had €13.2m in cash and €31.9m in receivables that were due within 12 months. So its liabilities total €57.9m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of €60.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, MS Industrie boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MS Industrie can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, MS Industrie made a loss at the EBIT level, and saw its revenue drop to €170m, which is a fall of 25%. That makes us nervous, to say the least.
So How Risky Is MS Industrie?
While MS Industrie lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €11m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. To that end, you should be aware of the 3 warning signs we've spotted with MS Industrie .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About XTRA:MSAG
MS Industrie
Primarily operates in the powertrain and ultrasonic technology businesses in Germany and internationally.
Slight and fair value.
