Is McBride (LON:MCB) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that McBride plc (LON:MCB) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for McBride

What Is McBride's Net Debt?

As you can see below, at the end of December 2022, McBride had UK£166.8m of debt, up from UK£147.0m a year ago. Click the image for more detail. On the flip side, it has UK£8.00m in cash leading to net debt of about UK£158.8m.

A Look At McBride's Liabilities

We can see from the most recent balance sheet that McBride had liabilities of UK£270.2m falling due within a year, and liabilities of UK£160.6m due beyond that. Offsetting these obligations, it had cash of UK£8.00m as well as receivables valued at UK£136.4m due within 12 months. So it has liabilities totalling UK£286.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the UK£55.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, McBride would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if McBride 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.

In the last year McBride wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to UK£781m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though McBride managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping UK£19m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through UK£27m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that McBride is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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.