These 4 Measures Indicate That MGI Digital Technology Société Anonyme (EPA:ALMDG) Is Using Debt Reasonably Well

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 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. We note that MGI Digital Technology Société Anonyme (EPA:ALMDG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that ALMDG is potentially overvalued!

What Is MGI Digital Technology Société Anonyme's Debt?

As you can see below, MGI Digital Technology Société Anonyme had €9.90m of debt at June 2022, down from €21.9m a year prior. But on the other hand it also has €31.9m in cash, leading to a €22.0m net cash position.

How Strong Is MGI Digital Technology Société Anonyme's Balance Sheet?

According to the last reported balance sheet, MGI Digital Technology Société Anonyme had liabilities of €10.9m due within 12 months, and liabilities of €8.86m due beyond 12 months. Offsetting this, it had €31.9m in cash and €5.75m in receivables that were due within 12 months. So it can boast €17.9m more liquid assets than total liabilities.

This surplus suggests that MGI Digital Technology Société Anonyme has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MGI Digital Technology Société Anonyme has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that MGI Digital Technology Société Anonyme has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. 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 MGI Digital Technology Société Anonyme 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. MGI Digital Technology Société Anonyme may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, MGI Digital Technology Société Anonyme actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MGI Digital Technology Société Anonyme has net cash of €22.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 43% over the last year. So we don't think MGI Digital Technology Société Anonyme's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in MGI Digital Technology Société Anonyme, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.