Is Munic (EPA:ALMUN) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Munic S.A. (EPA:ALMUN) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Munic

How Much Debt Does Munic Carry?

The image below, which you can click on for greater detail, shows that Munic had debt of €6.05m at the end of December 2023, a reduction from €6.95m over a year. However, it also had €598.0k in cash, and so its net debt is €5.45m.

How Healthy Is Munic's Balance Sheet?

According to the last reported balance sheet, Munic had liabilities of €7.43m due within 12 months, and liabilities of €12.8m due beyond 12 months. Offsetting these obligations, it had cash of €598.0k as well as receivables valued at €9.78m due within 12 months. So it has liabilities totalling €9.81m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €5.18m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Munic would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Munic 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, Munic made a loss at the EBIT level, and saw its revenue drop to €15m, which is a fall of 39%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Munic'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 €1.6m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of €1.8m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. For instance, we've identified 1 warning sign for Munic that 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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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.