These 4 Measures Indicate That Mainova (FRA:MNV6) Is Using Debt Safely

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 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 Mainova AG (FRA:MNV6) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mainova

What Is Mainova's Debt?

The image below, which you can click on for greater detail, shows that Mainova had debt of €462.2m at the end of June 2021, a reduction from €520.4m over a year. However, it does have €563.6m in cash offsetting this, leading to net cash of €101.4m.

How Healthy Is Mainova's Balance Sheet?

The latest balance sheet data shows that Mainova had liabilities of €986.6m due within a year, and liabilities of €1.54b falling due after that. On the other hand, it had cash of €563.6m and €388.7m worth of receivables due within a year. So its liabilities total €1.57b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Mainova has a market capitalization of €3.22b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Mainova also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Mainova grew its EBIT by 917% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Mainova's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mainova 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. Over the last three years, Mainova actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Mainova's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €101.4m. And it impressed us with free cash flow of €132m, being 105% of its EBIT. So we don't think Mainova's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Mainova's dividend history, without delay!

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.

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.

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