Is McPhy Energy (EPA:MCPHY) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, McPhy Energy S.A. (EPA:MCPHY) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for McPhy Energy

What Is McPhy Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 McPhy Energy had €5.25m of debt, an increase on €1.39m, over one year. However, its balance sheet shows it holds €24.0m in cash, so it actually has €18.7m net cash.

How Healthy Is McPhy Energy's Balance Sheet?

According to the last reported balance sheet, McPhy Energy had liabilities of €11.3m due within 12 months, and liabilities of €8.39m due beyond 12 months. On the other hand, it had cash of €24.0m and €9.48m worth of receivables due within a year. So it actually has €13.8m more liquid assets than total liabilities.

Having regard to McPhy Energy's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €907.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, McPhy Energy boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 42%, to €12m. With any luck the company will be able to grow its way to profitability.

So How Risky Is McPhy Energy?

Statistically speaking companies that lose money are riskier than those that make money. 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 €5.8m and booked a €6.3m accounting loss. But at least it has €18.7m 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. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Case in point: We've spotted 3 warning signs for McPhy Energy you should be aware of, and 1 of them doesn't sit too well with us.

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.

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