Does McPhy Energy (EPA:MCPHY) Have A Healthy Balance Sheet?

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. As with many other companies McPhy Energy S.A. (EPA:MCPHY) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

See our latest analysis for McPhy Energy

What Is McPhy Energy's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 McPhy Energy had debt of €4.60m, up from €1.39m in one year. But on the other hand it also has €197.7m in cash, leading to a €193.1m net cash position.

How Strong Is McPhy Energy's Balance Sheet?

We can see from the most recent balance sheet that McPhy Energy had liabilities of €18.7m falling due within a year, and liabilities of €4.20m due beyond that. Offsetting these obligations, it had cash of €197.7m as well as receivables valued at €12.7m due within 12 months. So it actually has €187.5m more liquid assets than total liabilities.

It's good to see that McPhy Energy has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that McPhy Energy has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine McPhy Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, McPhy Energy reported revenue of €15m, which is a gain of 28%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is McPhy Energy?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that McPhy Energy had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €7.3m and booked a €9.3m accounting loss. But at least it has €193.1m on the balance sheet to spend on growth, near-term. McPhy Energy's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should learn about the 3 warning signs we've spotted with McPhy Energy (including 1 which is a bit concerning) .

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. 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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