We Think Mountain Alliance (ETR:ECF) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Mountain Alliance AG (ETR:ECF) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mountain Alliance

What Is Mountain Alliance's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Mountain Alliance had €13.1m of debt, an increase on €7.56m, over one year. However, it also had €4.57m in cash, and so its net debt is €8.55m.

How Healthy Is Mountain Alliance's Balance Sheet?

According to the last reported balance sheet, Mountain Alliance had liabilities of €6.42m due within 12 months, and liabilities of €10.8m due beyond 12 months. Offsetting this, it had €4.57m in cash and €922.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €11.7m.

This deficit isn't so bad because Mountain Alliance is worth €39.9m, and thus could probably raise enough capital to shore up 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mountain Alliance 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, Mountain Alliance made a loss at the EBIT level, and saw its revenue drop to €10.0m, which is a fall of 26%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Mountain Alliance's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €3.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 €3.1m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Mountain Alliance has 2 warning signs we think you should be aware of.

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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