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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Makheia Group Société anonyme (EPA:ALMAK) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Makheia Group Société anonyme's Net Debt?
As you can see below, Makheia Group Société anonyme had €1.85m of debt at December 2020, down from €5.49m a year prior. On the flip side, it has €1.28m in cash leading to net debt of about €563.0k.
How Healthy Is Makheia Group Société anonyme's Balance Sheet?
We can see from the most recent balance sheet that Makheia Group Société anonyme had liabilities of €7.59m falling due within a year, and liabilities of €1.20m due beyond that. On the other hand, it had cash of €1.28m and €2.76m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.75m.
This deficit isn't so bad because Makheia Group Société anonyme is worth €10.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Makheia Group Société anonyme can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Makheia Group Société anonyme made a loss at the EBIT level, and saw its revenue drop to €9.8m, which is a fall of 30%. To be frank that doesn't bode well.
Not only did Makheia Group Société anonyme's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €2.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €724k of cash over the last year. So in short it's a really risky stock. 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 instance, we've identified 2 warning signs for Makheia Group Société anonyme (1 is a bit unpleasant) 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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