Is McPhy Energy (EPA:MCPHY) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for McPhy Energy

What Is McPhy Energy's Net Debt?

The image below, which you can click on for greater detail, shows that McPhy Energy had debt of €4.60m at the end of December 2021, a reduction from €5.12m over a year. But it also has €177.2m in cash to offset that, meaning it has €172.6m net cash.

How Healthy Is McPhy Energy's Balance Sheet?

We can see from the most recent balance sheet that McPhy Energy had liabilities of €25.8m falling due within a year, and liabilities of €6.40m due beyond that. Offsetting these obligations, it had cash of €177.2m as well as receivables valued at €11.8m due within 12 months. So it can boast €156.8m more liquid assets than total liabilities.

This surplus suggests that McPhy Energy is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 6.6%, although it did not report any earnings before interest and tax. 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 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 €11m and booked a €24m accounting loss. However, it has net cash of €172.6m, 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. However, not all investment risk resides within the balance sheet - far from it. For example - McPhy Energy has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.