Is ME Group International (LON:MEGP) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies ME Group International plc (LON:MEGP) makes use of debt. But is this debt a concern to shareholders?

We've discovered 1 warning sign about ME Group International. View them for free.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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.

What Is ME Group International's Debt?

You can click the graphic below for the historical numbers, but it shows that ME Group International had UK£47.9m of debt in October 2024, down from UK£77.2m, one year before. However, its balance sheet shows it holds UK£86.1m in cash, so it actually has UK£38.2m net cash.

How Healthy Is ME Group International's Balance Sheet?

We can see from the most recent balance sheet that ME Group International had liabilities of UK£85.2m falling due within a year, and liabilities of UK£47.6m due beyond that. On the other hand, it had cash of UK£86.1m and UK£15.5m worth of receivables due within a year. So its liabilities total UK£31.1m more than the combination of its cash and short-term receivables.

Of course, ME Group International has a market capitalization of UK£700.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ME Group International also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for ME Group International

Fortunately, ME Group International grew its EBIT by 7.9% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ME Group International 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ME Group International has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, ME Group International recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about ME Group International's liabilities, but we can be reassured by the fact it has has net cash of UK£38.2m. So is ME Group International's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for ME Group International that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.