Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 McPhy Energy S.A. (EPA:MCPHY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.
What Is McPhy Energy's Net Debt?
You can click the graphic below for the historical numbers, but it shows that McPhy Energy had €1.52m of debt in June 2021, down from €5.25m, one year before. However, it does have €184.8m in cash offsetting this, leading to net cash of €183.3m.
How Strong Is McPhy Energy's Balance Sheet?
We can see from the most recent balance sheet that McPhy Energy had liabilities of €19.6m falling due within a year, and liabilities of €5.16m due beyond that. Offsetting these obligations, it had cash of €184.8m as well as receivables valued at €14.6m due within 12 months. So it can boast €174.6m more liquid assets than total liabilities.
This surplus strongly suggests that McPhy Energy has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that McPhy Energy has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if McPhy Energy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year McPhy Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 9.0%, to €14m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is McPhy Energy?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year McPhy Energy had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €13m and booked a €14m accounting loss. However, it has net cash of €183.3m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - McPhy Energy has 2 warning signs we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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