Mincon Group (LON:MCON) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Mincon Group plc (LON:MCON) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Mincon Group

What Is Mincon Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Mincon Group had debt of €11.1m, up from €4.88m in one year. But on the other hand it also has €17.0m in cash, leading to a €5.96m net cash position.

A Look At Mincon Group's Liabilities

The latest balance sheet data shows that Mincon Group had liabilities of €24.3m due within a year, and liabilities of €21.8m falling due after that. Offsetting these obligations, it had cash of €17.0m as well as receivables valued at €21.0m due within 12 months. So its liabilities total €8.17m more than the combination of its cash and short-term receivables.

Of course, Mincon Group has a market capitalization of €289.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mincon Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Mincon Group grew its EBIT by 14% last year, making its debt load easier to handle. 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 Mincon Group 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Mincon Group 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. In the last three years, Mincon Group created free cash flow amounting to 6.6% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Mincon Group has €5.96m in net cash. On top of that, it increased its EBIT by 14% in the last twelve months. So we are not troubled with Mincon Group's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Mincon Group has 1 warning sign 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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