Is Making Science Group (BME:MAKS) A Risky Investment?

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. As with many other companies Making Science Group, S.A. (BME:MAKS) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Making Science Group

How Much Debt Does Making Science Group Carry?

The chart below, which you can click on for greater detail, shows that Making Science Group had €37.8m in debt in December 2022; about the same as the year before. However, it also had €31.7m in cash, and so its net debt is €6.15m.

A Look At Making Science Group's Liabilities

The latest balance sheet data shows that Making Science Group had liabilities of €86.4m due within a year, and liabilities of €32.4m falling due after that. Offsetting this, it had €31.7m in cash and €46.1m in receivables that were due within 12 months. So its liabilities total €41.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Making Science Group has a market capitalization of €88.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Making Science Group 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.

In the last year Making Science Group wasn't profitable at an EBIT level, but managed to grow its revenue by 89%, to €213m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Making Science Group still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €677k. 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. We would feel better if it turned its trailing twelve month loss of €5.0m into a profit. 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 instance, we've identified 3 warning signs for Making Science Group (1 doesn't sit too well with us) 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. 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.