Is Mitchells & Butlers (LON:MAB) Using Debt In A Risky Way?

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, Mitchells & Butlers plc (LON:MAB) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mitchells & Butlers

How Much Debt Does Mitchells & Butlers Carry?

You can click the graphic below for the historical numbers, but it shows that Mitchells & Butlers had UK£1.88b of debt in April 2021, down from UK£2.15b, one year before. However, because it has a cash reserve of UK£144.0m, its net debt is less, at about UK£1.73b.

How Strong Is Mitchells & Butlers' Balance Sheet?

We can see from the most recent balance sheet that Mitchells & Butlers had liabilities of UK£583.0m falling due within a year, and liabilities of UK£2.57b due beyond that. Offsetting these obligations, it had cash of UK£144.0m as well as receivables valued at UK£68.0m due within 12 months. So it has liabilities totalling UK£2.94b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the UK£1.61b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Mitchells & Butlers 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 it is future earnings, more than anything, that will determine Mitchells & Butlers's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Mitchells & Butlers made a loss at the EBIT level, and saw its revenue drop to UK£655m, which is a fall of 69%. To be frank that doesn't bode well.

Caveat Emptor

While Mitchells & Butlers's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping UK£287m. 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. Not least because it burned through UK£174m in negative free cash flow over the last year. So suffice it to say 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 example Mitchells & Butlers has 2 warning signs (and 1 which is significant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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