The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Mainova AG (FRA:MNV6) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Mainova
What Is Mainova's Debt?
The image below, which you can click on for greater detail, shows that at June 2024 Mainova had debt of €1.04b, up from €978.0m in one year. And it doesn't have much cash, so its net debt is about the same.
How Strong Is Mainova's Balance Sheet?
We can see from the most recent balance sheet that Mainova had liabilities of €1.68b falling due within a year, and liabilities of €1.91b due beyond that. Offsetting these obligations, it had cash of €14.3m as well as receivables valued at €599.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.97b.
This deficit casts a shadow over the €1.88b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Mainova would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mainova's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year Mainova had a loss before interest and tax, and actually shrunk its revenue by 40%, to €4.0b. That makes us nervous, to say the least.
Caveat Emptor
While Mainova's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €32m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €88m over the last twelve months. That means it's on the risky side of things. 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. For example Mainova has 3 warning signs (and 1 which is significant) we think you should know about.
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About DB:MNV6
Average dividend payer low.
